To achieve its mandate, a central bank needs to understand how its actions affect the financial system and the economy. Switzerland is a small open economy with a stable political and institutional environment. This creates a special setting for monetary policy. Our main tool is the SNB policy rate. If necessary, the SNB also uses other measures.

Understanding the transmission of our monetary policy to the Swiss economy is important for the SNB in achieving its mandate. Changes in the policy rate affect monetary and financial conditions. Short- and long-term rates change, and asset prices and the exchange rate move. This affects consumption and investment, as well as imports and exports. According to our estimates for Switzerland, both the 10-year interest rate and the exchange rate go up after a policy rate increase. One year after the increase, both inflation and output are lower.

How have we applied our monetary policy strategy? In the years after the global financial crisis, policy rates reached very low levels, both in Switzerland and abroad. Safe-haven flows posed a threat to price stability. In such an environment, it was important to supplement interest rate policy with foreign exchange interventions to safeguard price stability. In 2021, after years of low inflation, inflation started to rise globally. Around the world, supply was constrained, demand was strong and monetary policy was loose. The SNB addressed the resulting inflationary pressure by using a combination of policy rate hikes and foreign-currency sales. This prevented a broadening of inflation and limited second-round effects on domestic prices.

Over the past few decades, the SNB has faced many crises that threatened price stability. Despite these repeated challenges, the SNB has fulfilled its mandate - price stability in the medium term.

Ladies and gentlemen

The economy shapes monetary policy. And monetary policy shapes the economy. So, the central bank responds to what happens in the economy. And the economy responds to the central bank's decisions. To achieve its mandate, a central bank needs to understand how its actions affect the financial system and the economy.

Switzerland is a small open economy with a stable political and institutional environment. This creates a special setting for monetary policy. Our monetary policy strategy takes this setting into account. Let me explain how. Our main tool is the SNB policy rate. We seek to keep the secured short-term Swiss franc money market rates close to the SNB policy rate. Changes in interest rates affect both financial markets and the real economy. They also work through the exchange rate. This is key for Switzerland. If necessary, the SNB also uses other measures. Notably, foreign exchange interventions. Understanding the transmission of our monetary policy to the Swiss economy is important for the SNB in achieving its mandate.

Today, I will therefore talk about the transmission and conduct of monetary policy. I will focus on Switzerland.

1. Two key features shaping the Swiss economic environment: openness and stability

To understand the Swiss economy, it helps to start with two basic features. Much of what makes the Swiss economic environment special follows from these features.

The first feature: Switzerland is a small open economy. Smaller countries tend to be more open. You can see this relationship in the chart (slide 2). You see population size on the x-axis. And on the y-axis, the KOF Globalisation Index, which measures openness. To show the relationship, we added a regression line. The regression line in the chart confirms: smaller countries are more open. Actually, we are not that small. Switzerland is in the middle when it comes to population size. According to the KOF indicator, Switzerland is very open. More than half of what we produce is sold abroad. More than half of the goods we consume come from abroad. At the same time, Switzerland has a relatively important currency. The Swiss franc is one of the world's most traded currencies.

Switzerland's second feature is its long-standing stability. Political stability and institutional stability. This stability is remarkable. Investors at home and abroad know: the rules of the game in Switzerland are reliable. They will not change overnight.

These two features have three implications.

Because we are open, the world's storms hit us hard. So, the first implication is: Switzerland is highly exposed to external shocks. When global demand weakens, when global trade is disrupted or when global financial markets are in turmoil, we feel this painfully. The exchange rate has a major influence on inflation and the economy in Switzerland.

The second implication follows from stability: Switzerland has relatively low interest rates. Low interest rates are a long-standing feature of our economy. The chart illustrates this: Swiss rates have typically been at the lower end of the range of advanced economies (slide 3). Important reasons for this are trust, as well as fiscal prudence and monetary stability. Monetary stability is the result of the SNB's commitment to price stability. Because of trust and long-standing stability, investors at home and abroad view Switzerland as safe. And for safety, they are willing to accept a lower return. In other words, stability lowers the price of borrowing for our companies, households and the government. 

The third implication also follows from stability: the Swiss franc is a safe-haven currency. The same trust that keeps interest rates low makes the franc attractive in times of crisis. Whenever there is a crisis in the world, the Swiss franc comes under appreciation pressure. In recent years, the franc often appreciated around risk-off events. The chart shows the cumulative appreciation of the franc in the 20 days following major risk-off events (slide 4). There have been quite a few of these events in recent years. These include the COVID-19 pandemic, the Ukraine war, the US banking crisis, US tariffs and the conflict in the Middle East. For example, after the announcement of US tariffs in April 2025, the Swiss franc appreciated by more than 4% within five days. The chart also shows that the appreciation is not the same in every episode. It depends on many factors. Risk sentiment is just one of them.

Compared to other currencies, the franc has relatively strong safe-haven properties. On this chart, we compare the sensitivity of several currencies to uncertainty (slide 5). We use large increases in the VIX, a measure of market volatility, as a proxy for spikes in global uncertainty. We can see that only a few currencies are safe havens. Apart from the Swiss franc, only the Japanese yen and the US dollar consistently appreciated following large VIX increases. The euro was broadly neutral. Currencies of other small open economies like Sweden or Norway are not safe havens. As you can see, the Norwegian krone and the Swedish krona tended to depreciate when global uncertainty increased.

The relation between low interest rates and safe-haven status deserves a closer look. As long as Swiss interest rates are clearly lower than abroad, the price of safety is adequate. Investors trade off the security of Swiss assets against the higher yield elsewhere. This is what we typically observe. But the situation changes when the global interest rate level is low. When the interest rate differential is small, holding Swiss francs becomes relatively more attractive. In other words, the price of safety is low. If in such an environment the global risk sentiment deteriorates, the franc becomes even more attractive as a safe haven. Appreciation pressure on the Swiss franc intensifies.

To summarise: being a small open economy exposes us to external shocks. Our stability brings us low interest rates and a safe-haven currency.

The SNB's monetary policy strategy takes this into account. It consists of three elements. The first element is our definition of price stability. We define price stability as an inflation rate between 0% and 2%. We want to keep inflation within this range in the medium term. Inflation cannot be fine-tuned in the short run. We do not focus on a specific point within that range. Using a range instead of a point target allows us to tolerate some fluctuations in inflation. This matters especially for a small open economy that often faces external shocks. The focus on the medium term gives us further flexibility. With this flexibility we can avoid disproportionate measures.

The second element is our conditional inflation forecast. It is our main indicator for monetary policy decisions. It summarises our assessment of the economy and the implications for inflation. The conditional inflation forecast is also a key element in our communication.

The third element concerns the implementation of monetary policy. To ensure price stability, the SNB maintains appropriate monetary conditions. Monetary conditions are not only shaped by the interest rate but also by the exchange rate. The SNB policy rate is the main tool for influencing monetary conditions. If necessary, the SNB may use additional monetary policy measures, such as foreign exchange interventions, to influence monetary conditions.

Influencing monetary conditions is not an end in itself. What matters is how monetary conditions affect the economy, how they influence demand, output and in the end inflation. This brings me back to the topic of my presentation, namely the question of how monetary policy actually affects the economy: the monetary transmission mechanism.

Let me turn to this now.

2. Monetary policy transmission in Switzerland and how the SNB uses its policy measures

Monetary policy transmission in Switzerland

Let us revisit the basic principles of monetary policy transmission (slide 6). Let's first look at what happens after changes in the policy rate. As we all know, changes in the policy rate affect monetary and financial conditions. Short- and long-term rates change, and asset prices and the exchange rate move. This affects consumption and investment as well as imports and exports. In sum, aggregate demand changes and this has an effect on inflation.

It is important to note that interest rate changes also affect the exchange rate. Changes in the exchange rate affect inflation in two ways. Directly - via the prices of imports. In Switzerland, a quarter of the consumer basket is imported. So, this effect is substantial. And indirectly - the exchange rate affects inflation via aggregate demand. For a small open economy like Switzerland, this is key. Foreign trade accounts for a large part of our gross domestic product (GDP).

This was a qualitative description of the transmission. I will now turn to a quantitative assessment.

Let's look at what happened when the SNB started to increase its policy rate in June 2022. We raised it by 50 basis points. The hike was a bit bigger than expected by markets. Right after our 9:30 am press release, financial‑market prices moved. You see this on the slide (slide 7). Medium- and long-term interest rates went up. The Swiss franc appreciated against the euro and the US dollar. Stock prices fell. In short, markets reacted as expected to a policy-rate increase.

Let's go beyond this single event: How do long-term interest rates and the exchange rate typically respond to changes in the policy rate? This is shown in the left graph on this slide (slide 8).  Both the 10-year rate and the exchange rate go up after the policy rate increase. This confirms the takeaways from the single event above. Changes in the policy rate have a significant effect on longer-term interest rates. And - very importantly - changes in the policy rate affect the exchange rate.

We have now covered the initial steps of monetary transmission to financial markets. Ultimately, we are interested in how the policy rate affects economic activity and inflation. The right graph shows our estimates for Switzerland. The results are as expected: both inflation and output are lower one year after an increase in the policy rate.

We also compared our results with estimates by the Federal Reserve for the US and by the ECB for the euro area. In Switzerland, the output effect is typically a bit stronger than in the euro area and the US after one year.  This reflects the greater importance of the exchange rate in Swiss monetary transmission. The inflation response in Switzerland is similar to that in the euro area and slightly stronger than in the US after one year. Again, this is in line with the greater importance of the exchange rate.

We just saw how changes in the policy rate transmit to financial markets and the real economy. Let me now turn to our conduct of monetary policy.

How the SNB uses its monetary policy measures

How have we actually applied our monetary policy strategy? What does it mean when we say that we may also use other measures, such as foreign exchange interventions (FXI), if necessary? I would like to share two examples of how we used FX interventions in the past. The first example is about foreign-currency purchases and the second is about foreign-currency sales.

The first example relates to the global financial crisis (GFC) and its aftermath. The GFC was a huge external shock for Switzerland. In response to the crisis, central banks around the world sharply lowered policy rates and increased liquidity. Policy rates reached very low levels, both in Switzerland and abroad. This led to a compression of the differential between foreign and Swiss interest rates. The Swiss franc came under strong appreciation pressure (slide 9). In view of the significantly higher risks, safe-haven flows intensified. This flight to safety led to even more upward pressure on the Swiss franc. Deflationary risks became serious. In March 2009, the SNB said that it would "purchase foreign currency on the foreign exchange market, to prevent any further appreciation of the Swiss franc against the euro".  A continuing appreciation would have threatened price stability.

For a while, the situation calmed down. But in 2010, the European sovereign debt crisis shook confidence in financial markets. This again led to upward pressure on the Swiss franc. In 2011, the appreciation accelerated. This appreciation posed a threat to price stability and the Swiss economy. From the summer of 2007 to the summer of 2011, the Swiss franc rose more than 40% in nominal effective terms. The massive overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of a deflationary development.

In September 2011, the SNB set a minimum exchange rate against the euro. The SNB emphasised that it would enforce this minimum rate with the utmost determination and that it was prepared to buy foreign currency in unlimited quantities.

This example illustrates how we used FXI after the strong shift in the risk environment. Policy rates had reached very low levels, both in Switzerland and abroad. Safe-haven flows posed a threat to price stability. In such an environment, it was important to supplement interest rate policy with FXI to safeguard price stability.

The second example concerns the inflation surge after the pandemic. In 2021, after years of low inflation, price pressures began to build as the world emerged from the pandemic. Globally, supply was constrained, demand was strong and monetary policy was loose. In this environment, inflation started to rise globally. You see this on the left chart (slide 10). The war in Ukraine in early 2022 lifted energy prices further. Again, Switzerland was exposed to several global shocks.

How did the SNB address the inflationary pressure?

We used a combination of policy rate hikes and foreign-currency sales - as you can see on the right. When inflation started to rise in 2021, the SNB's first response was to reduce foreign-currency purchases. We let the Swiss franc appreciate. The appreciation swiftly limited the increase in imported inflation. To further counter the inflationary pressure, we began raising the policy rate in June 2022. This prevented a broadening of inflation and limited second-round effects on domestic prices.

In addition, we started to sell foreign exchange in the second half of 2022. By the end of 2023, we had sold CHF 161 billion - almost 20% of GDP. The resulting appreciation of the Swiss franc further contributed to dampening imported inflation. By June 2023, the SNB policy rate had reached 1.75% - a total tightening of 2.5 percentage points within one year. Overall, we were able to tighten monetary conditions by supplementing rate hikes with foreign-currency sales. This brought inflation back into the range of price stability.

As in the first example, it was important to supplement interest rate policy with foreign-exchange operations to safeguard price stability.

3. Achieving price stability despite repeated challenges

Ladies and gentlemen

Swiss monetary policy operates in a small open economy with a stable political and institutional environment. Switzerland's openness exposes it to external shocks. Its stability brings low interest rates compared to other countries, and makes the franc a safe‑haven currency.

Over the past few decades, the SNB has faced many crises that threatened price stability. If you look at inflation in Switzerland since the start of this century, you see that it has been within the range consistent with price stability most of the time - despite these repeated challenges (slide 11). The SNB has fulfilled its mandate - price stability in the medium term. This shows that our monetary policy strategy works across a broad range of circumstances.

Switzerland's openness and stability shape how monetary policy works here. To maintain price stability, we need to take these features seriously. We need to understand how our policy is transmitted. We need to have the right tools. And we need to have a strategy flexible enough to deal with a demanding environment.

Thank you very much for your attention.