In accordance with the Federal Constitution and the National Bank Act (NBA), the SNB has the mandate to conduct its monetary policy in such a way that money preserves its value and the Swiss economy can develop in an appropriate manner. The Constitution (art. 99) obliges the SNB, as an independent central bank, to conduct a monetary policy that serves the interests of the country as a whole. In addition, art. 5 NBA specifies that the SNB is to ensure price stability while taking due account of the development of the economy.

The SNB ensures price stability by maintaining appropriate monetary conditions. This means keeping interest rates and the exchange rate aligned to the prevailing economic situation. Low interest rates promote the supply of money and credit to the economy, thereby increasing demand for goods and services, as well as investment. Over time, however, production capacity may become stretched, leading to a rise in the price level. Equally, there is the risk of imbalances on the financial and real estate markets. Conversely, rising interest rates lead to a shortage in the supply of money and credit, thereby holding back aggregate demand. This leads in turn to a fall in capacity utilisation and causes downward pressure on prices. Given Switzerland's strong integration in the global economy, the exchange rate influences both the price level via import prices, and the utilisation of production capacity via foreign trade.

The SNB influences monetary conditions by setting the SNB policy rate and ensuring that the short-term secured money market rates are close to the SNB policy rate. Money market interest rates pass through to the general interest rate level, which in turn influences the exchange rate. Generally, higher interest rates lead to a stronger exchange rate, and lower interest rates to a weaker exchange rate. In addition, the SNB may also use other monetary policy measures to influence the interest rate level and the exchange rate. For example, in recent years it has intervened in the foreign exchange market as necessary to contribute to appropriate monetary conditions.

As a rule, the SNB conducts a monetary policy assessment every quarter (in the middle of March, June, September and December) and decides on the monetary policy course. If circumstances so require, such decisions can also be made at other times. The SNB informs the public of its monetary policy decisions and the reasoning behind them. For its monetary policy decisions, the SNB analyses the economic and monetary situation (in particular the inflation outlook) in Switzerland. The monetary policy assessment is also based on the information gathered and evaluated by the SNB during its company talks (cf. Questions and answers on regional economic relations). Special attention is paid to economic developments abroad because they play an important role for a country like Switzerland with its strong international integration. Based on this comprehensive analysis, the SNB draws up an inflation forecast and decides whether its monetary policy is to remain unchanged, or be tightened or eased (cf. Questions and answers on monetary policy implementation) The latest monetary policy decisions are available at Monetary policy decisions.

The SNB uses its monetary policy strategy to establish the framework for monetary policy decision-making and to set out the manner in which it operationalises its statutory mandate to ensure price stability. The strategy, which has been in place since 2000, consists of three elements. The first element specifies what the SNB understands by price stability. The second element refers to the conditional inflation forecast as the main indicator for monetary policy and as a central instrument of communication. The third element describes how the SNB implements its monetary policy by influencing the interest rate level and the exchange rate.

The SNB subjected its monetary policy strategy to a comprehensive review in 2022. The review concluded that the strategy has fundamentally proved its worth. There was no need to adjust the first two elements. The formulation of the third element, however, has been adjusted. The SNB implements its monetary policy by setting the SNB policy rate. In so doing, it seeks to keep the short-term secured Swiss franc money market rates close to the SNB policy rate. The third element now explicitly provides for the SNB to also use additional monetary policy measures to influence the exchange rate or the interest rate level, if necessary. With this adjustment, the SNB is taking into account the increased importance of foreign exchange market interventions in recent years. Until now they have been mentioned in explaining the strategy, but were not explicitly included in the third element.

The SNB defines price stability as a rise in the Swiss consumer price index (CPI) of less than 2% per annum. The CPI is calculated by the Swiss Federal Statistical Office (SFSO). Further information is available on the CPI website of the SFSO (www.bfs.admin.ch). Price stability refers to the overall average of price changes. Prices of individual goods and services can easily fluctuate more strongly. Deflation - in other words, a sustained decrease in the overall price level - is also regarded as a breach of price stability.

Price stability is an important prerequisite for growth and prosperity. It means that money retains its value over time and prices can optimally fulfil their informative function for decisions regarding output and consumption. By seeking to keep prices stable, the SNB creates an environment in which businesses can make plans on a reliable basis and fully exploit their production potential.

A sustained increase in the price level (inflation) and a sustained decrease in the price level (deflation) both impair economic development. Inflation and deflation make decision-taking more difficult for manufacturers and consumers. They distort price signals, which can lead to the inefficient use of the production factors labour and capital. In addition, they cause redistributions of income and wealth and, as a rule, put the economically more vulnerable at a disadvantage.

With its definition, the SNB takes into account the fact that inflation cannot be measured precisely. Measurement problems arise, for example, when the quality of goods and services improves. As a result, measured inflation tends to slightly overstate actual inflation.

The CPI is based on a basket of goods that mirrors typical consumer behaviour in Switzerland, and is therefore a comprehensive and widely accepted indicator of developments in goods and service prices in Switzerland. Assets such as real estate investments and shares are not objects of consumption, but serve as a store of value, so they do not flow directly into the assessment of price stability. However, the SNB does take developments in asset markets into account for its monetary policy assessments, since these markets have an indirect influence on price stability and the development of the economy as a whole. Real estate price movements also influence the CPI indirectly through rental prices.

Core inflation, which excludes certain categories of goods such as energy and food, as well as other inflation indicators can all be useful for assessing inflation trends. For the SNB, however, headline inflation is decisive because it is the relevant measure for the Swiss population.

An independent monetary policy that is geared towards the objective of price stability fundamentally requires flexible exchange rates. This does not mean, however, that the SNB disregards exchange rate developments. In a small open economy such as Switzerland's, changes in the exchange rate have a significant impact on inflation and the economy. Together with the interest rate level, the exchange rate determines the monetary conditions. If the SNB adjusts interest rates or intervenes in the foreign exchange market, this has an impact on the exchange rate. A depreciation of the Swiss franc makes imported goods and services more expensive, thereby increasing inflation. At the same time, Swiss franc depreciation stimulates exports and thus economic activity, which over time also leads to higher inflation. Conversely, an appreciation of the Swiss franc has a dampening effect on economic activity and inflation.

In connection with its quarterly monetary policy assessments, the SNB publishes a conditional inflation forecast covering a three-year period. This forecast serves as the main indicator for the respective monetary policy decision. Furthermore, the conditional inflation forecast provides valuable guidance for the general public and is therefore a key element of the SNB's external communication.

The SNB's inflation forecast is based on the assumption that the SNB policy rate communicated at the time of publication will remain unchanged over the next three years. This conditional forecast shows how the SNB expects consumer prices to move in the event that the SNB policy rate does not change. For this reason, the SNB's conditional inflation forecast cannot be compared with forecasts by banks or research institutions, which, as a rule, factor anticipated policy rate development - i.e. the SNB's reaction to economic and price movements - into their forecast calculations.

A time span of that length is certainly fraught with great uncertainty, but three years is approximately the period required for monetary policy measures to take full effect on output and prices. With its three-year inflation forecast, the SNB thus takes account of the fact that the effects of monetary policy are lagged, and it therefore has to adopt a forward-looking stance in its monetary policy decisions and react at an early stage to threats of inflation or deflation.

If the inflation forecast shows values that lie outside the price stability range, an adjustment to monetary policy may be necessary. Should inflation threaten to exceed 2% on a sustained basis, the SNB would consider tightening its monetary policy. Conversely, it would envisage easing its policy if deflationary trends were identified. In its monetary policy decisions, the SNB weighs up the expected impact of monetary policy measures against the potential risks.

The SNB does not react mechanically to the inflation forecast. In its monetary policy decisions, it considers the general economic situation as well as risks that are not factored into the forecast models. If inflation temporarily exceeds 2% as a result of exceptional factors, such as a sudden and large increase in oil prices or strong exchange rate fluctuations, monetary policy does not necessarily need to be adjusted. The same applies to short-lived negative inflation.

The SNB draws up its inflation forecast on the basis of various forecast models and numerous macroeconomic indicators, which it regularly explains and comments on in its report on the quarterly monetary policy assessment (published in the Quarterly Bulletin). For a country like Switzerland with its strong international integration, developments in the global economy play an important role. The SNB's inflation forecast is therefore based on assumptions concerning future global trends. It uses different scenarios relating to global economic developments, as required, in order to assess specific risks for the forecast.

Since the introduction of the SNB's new monetary policy strategy at the end of 1999, inflation has largely remained within the bandwidth that the SNB equates with price stability. Although there have been instances where inflation has temporarily moved outside the defined range, price stability has been maintained over time. If inflation temporarily exceeds 2% or temporarily sinks below 0%, this may be the result of exceptional factors, such as a sudden and large change in oil prices or strong exchange rate fluctuations.