Monetary Policy Strategy

The Federal Constitution entrusts the Swiss National Bank, as an independent central bank, with the conduct of monetary policy in the interests of the country as a whole (art. 99 FC). The mandate is explained in detail in the National Bank Act (art. 5 para. 1), which requires the SNB to ensure price stability and, in so doing, to take due
account of economic developments.

Constitutional and legal mandate


The Federal Constitution entrusts the Swiss National Bank, as an independent central bank, with the conduct of monetary policy in the interests of the country as a whole (art. 99 FC). The mandate is explained in detail in the National Bank Act (art. 5 para. 1), which requires the SNB to ensure price stability and, in so doing, to take due
account of economic developments.


The SNB is thus charged with resolving in the best general interests any conflicts arising between the objective of price stability and business cycle considerations, giving priority to price stability. The requirement to act in the ‘interests of the country as a whole’ requires the National Bank to gear its policy to the needs of the Swiss
economy as a whole rather than the interests of individual regions or industries.


Significance of price stability


Price stability contributes to economic growth. Stable prices are an important prerequisite for the smooth functioning of the economy, as both inflation and deflation impede decision-making by consumers and producers, and generate high social costs.


The aim of the SNB’s monetary policy is to ensure price stability in the medium and long term; in other words, it strives to prevent both sustained inflation and deflation. Short-term price fluctuations, however, cannot be counteracted by monetary policy. By keeping prices stable, monetary policy creates an environment in which the economy can exploit its production potential.


To secure price stability, the SNB must provide appropriate monetary conditions. If interest rates are too low for a lengthy period, the supply of money and credit to the economy is too high, thus triggering an inordinate demand for goods and services. Although this boosts production initially, bottlenecks occur in the course of time
and production capacity is stretched, thus causing a rise in the level of prices. Conversely, if interest rates are too high for a lengthy period, this reduces the supply of money and credit to the economy and, consequently, leads to a shortage of aggregate demand. This has a dampening effect on the prices of goods and services.


Taking economic activity into account


The economy is subject to numerous domestic and foreign shocks. These cause fluctuations in the business cycle which generate pressures on prices that are more or less pronounced. Such fluctuations are inevitable.  


Although monetary policy is medium and long-term in nature, it can help to limit these fluctuations. In this sense, the National Bank also takes the economic development into account when formulating its monetary policy.


The SNB faces highly diverse situations. The most common cause of inflationary or deflationary phases is when aggregate demand for goods and services does not develop in line with the economy’s production capacity.


Such situations can arise, for example, as a result of unforeseen fluctuations in the international economy, persistent exchange rate distortions, serious government budget problems or inappropriate money supply levels in the past. Inflationary pressures increase in phases of economic overheating and decrease in phases when production capacity is not fully utilised. The National Bank will thus tend to tighten monetary policy in the first case and ease it in the latter. Consequently, monetary policy that is geared to price stability has a corrective influence on aggregate demand and thus helps to smooth economic activity. The SNB’s strategy must therefore aim at gradually restoring price stability.


The situation is more complex when prices rise owing to shocks that drive up corporate costs and curb production. A continuous rise in the oil price is an example of such a shock. Under such circumstances, monetary policy must make sure that the higher production costs do not result in an inflationary spiral. It should also see to it that the companies affected by the shocks are not excessively disadvantaged. A too hasty restoration of price stability might have adverse effects on the business cycle and employment.


Even though the SNB takes economic developments into consideration when formulating its monetary policy, it cannot be expected to fine-tune them. There are too many uncertainties regarding the cause and duration of the shocks that impair economic performance, the transmission mechanisms, the time lag that elapses before monetary policy affects the business cycle and prices, and the extent of its impact.  


Monetary policy approach


The monetary policy in force since 2000 consists of the following three elements: (1) a definition of price stability, (2) a medium-term inflation forecast, and (3) a target range for a reference interest rate, the threemonth Libor (London Interbank Offered Rate) for Swiss francs – an operational level element.


Definition of price stability


The Swiss National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum. In so doing, it takes account of the fact that not every price movement is necessarily inflationary in nature. Furthermore, it believes that inflation cannot be measured accurately. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not properly accounted for in the CPI; as a result, the measured level of inflation will tend to be slightly overstated.


Quarterly publication of inflation forecast


The SNB reviews its monetary policy on a regular basis to ensure that it is appropriate for the maintenance of price stability. With this in mind, it publishes a quarterly forecast of the development of inflation over the three subsequent years. The period of three years corresponds more or less to the time required for the transmission
of monetary stimuli to the economy. Forecasts over such a long time horizon are, however, fraught with considerable uncertainties. By publishing a medium to long-term forecast, the SNB emphasises the need to adopt a forward-looking stance and to react at an early stage to any inflationary or deflationary threats.


The SNB’s inflation forecast is based on a scenario for global economic developments and on the assumption that the Libor will remain constant over the entire forecasting period. The forecast thus maps the future development of prices based on a specific world economic scenario and an unchanged monetary policy in
Switzerland. For this reason, it is not directly comparable with forecasts incorporating expected monetary policy decisions.


Indicators of relevance to the inflation forecast


In the medium and long term, price developments depend decisively on the supply of money. The monetary aggregates and loans thus hold a relatively important position among the many indicators employed in the various quantitative models used for forecasting inflation over the next two to three years. For shorter-term inflation forecasts, other indicators relating, for instance, to economic activity, exchange rates or oil prices, are generally of greater importance.


The SNB regularly issues statements on the development of the principal monetary policy indicators factored into its inflation forecast. It has provided details of the models it uses in several of its publications.


Review of monetary policy based on the inflation forecast


If the inflation forecast indicates a deviation from the level of inflation that the SNB equates with price stability, monetary policy needs to be adjusted. Should inflation threaten to exceed 2%permanently, the SNB would consider tightening its monetary policy. Conversely, it would loosen the monetary reins if there were a danger
of deflation. The National Bank does not, however, react mechanically to its inflation forecast; it takes account of the general economic situation in its decisions on monetary policy measures.


If inflation temporarily exceeds the 2% ceiling in extraordinary circumstances, for example following a sudden massive rise in oil prices or strong exchange rate fluctuations, monetary policy does not necessarily need to be adjusted. The same applies to short-term deflationary pressures.


Target range for three-month Libor


The SNB implements its monetary policy by influencing the interest rate level in the money market. It fixes a target range for the three-month Libor, which is the most important interest rate for short-term Swiss franc investments, and publishes it regularly. As a rule, this target range extends over one percentage point, and the
SNB generally aims to keep the Libor in the middle of the range.


. "Swiss National Bank." . . Swiss National Bank. 1.31.08 <>.