Thomas Jordan: What are the consequences of the war in Ukraine
for the SNB's monetary policy?
Speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at
the 114th Ordinary General Meeting of Shareholders of the Swiss National Bank, Berne, 29 April
2022.
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Madam President of the Bank Council
Dear Shareholders
Dear Guests
I would like to warmly welcome you all to our Annual General Meeting, and I am delighted that this
year we are able to meet in person again. The geopolitical situation has changed fundamentally
in the past few months. Russia's attack on Ukraine has shaken us all. Our thoughts are with the
victims of this terrible war.
Considerations of the economic consequences pale by comparison with this suffering.
Nevertheless, such deliberations are also important for the citizens of Switzerland, and the
Swiss National Bank is therefore working intensively on addressing the impact the war will have.
On the one hand, we have to properly contextualise the immediate economic effects. On the
other hand, we also have to address questions pertaining to the longer term.
I will begin my speech by looking at the closely interconnected global economy as we knew it
until just recently, the gains in prosperity it brought, and what it meant for monetary policy. I will
go on to explain how the consequences of the war that can already be felt are influencing our
current monetary policy. I will then discuss the other side of global economic integration, namely
the interdependencies between countries and markets. At the end of my remarks, I will offer
some thoughts on what is likely to change with regard to monetary policy if global economic
integration were to decrease again as a result of the war.
Monetary policy in an integrated global economy
The world has become increasingly interconnected economically over the past decades. Until a
short while ago, we thought these ties would continue to become closer. The US-China trade
dispute of recent times had already cast some doubt on the durability of global integration. The
coronavirus pandemic has restricted mobility and strained global supply chains. However, the
geopolitical confrontation we see today has an entirely different dimension. Russia's invasion of
Ukraine has reopened old rifts in many respects. We therefore have to ask what the
consequences would be if the economic fragmentation already caused by the war were to
persist, or even increase further?
To assess this, I would first like to look briefly at the process of globalisation over the past thirty
years or so. At the beginning of the 1990s, the erstwhile closed-off states of the Eastern bloc
gradually began to open up, and so too did China and other Asian countries. Since then,
economic integration worldwide has been considerable. Today, the value of goods and services
traded internationally is three and a half times higher than it was then. Average real per capita
income worldwide has increased by two thirds. The proportion of the world's population living in
extreme poverty has fallen from just under 40% to 10%.
This rapid improvement in prosperity was made possible by the better use of the three factors
needed for growth: labour, capital and technology.
After 1990 we saw an increasingly international division of labour. Countries specialised in areas
where they were particularly proficient compared with their trading partners. The manufacture of
labour-intensive products was outsourced to countries with relatively low wage levels. This
increasing division of labour resulted on the one hand in rising incomes, above all in the new
production countries, and on the other hand in a decline in goods prices worldwide. This effect
was strengthened further by international competition.
With increasing economic integration, capital, the second factor influencing growth, could be
invested globally. Foreign direct investment and loans helped in the construction of production
facilities and infrastructures in the newly opened regions of the world. The high levels of savings
in the advanced economies were thus put to productive use in the catch-up growth of these
regions.
That leaves the third factor: technology. The integration of the global economy led to a massive
transfer of knowledge between countries, which greatly accelerated the economic development
of the poorer nations. Furthermore, the growth in the number of people participating in the global
economy meant that there were a lot more ideas and innovations.
More (and more highly specialised) workers, better and more broadly invested capital and a rapid
exchange of knowledge - all this led to higher economic growth and greater prosperity
worldwide.
Globalisation also had a major impact on monetary policy. The most important change in this
respect was the increasingly global production of goods, which reduced inflationary pressure.
The latter also fell because the global economy was able to satisfy increases in demand in
individual countries comparatively easily. In the less integrated economy of the Cold War era,
higher demand quickly led to bottlenecks and rising prices.
With inflationary pressure lower, central banks were able to react more strongly to adverse
economic developments. And this was often appropriate, in retrospect. For the global integration
of the financial markets did not just foster growth, it also made it easier for local crises to spread
to other countries. In the past 15 years, there have been repeated instances where such global
crises have prompted the major central banks to substantially ease their monetary policies to
prevent severe economic declines and persistently negative inflation rates. This easing was
initially achieved through interest rate reductions, but then increasingly by means of
unconventional measures such as quantitative easing and, in the case of Switzerland, foreign
exchange market interventions.
The expansion in the range of monetary policy instruments also has to do with globalisation. The
traditional way to ease monetary policy is by lowering the policy rate below its neutral level.
Conversely, tightening is achieved by raising the policy rate above its neutral level. The level of
this neutral rate of interest is determined by the supply of savings and the demand for these
savings for investment purposes. At the outset of globalisation, the neutral interest rate was
initially high owing to the considerable demand for investment in the newly opened economies.
However, as prosperity increased and life expectancy rose, the supply of savings also grew
markedly, and the neutral rate of interest declined as a result. If central banks wanted to ease
their monetary policy, they therefore had to set their policy rate correspondingly low. And
because you cannot lower interest rates indefinitely without at some point triggering a flight to
cash, after the outbreak of the global financial crisis in 2008 many central banks resorted to
unconventional monetary policy measures by buying various assets and expanding their balance
sheets.
Thanks to this new, broad set of monetary policy instruments, central banks thus also had the
necessary room to manoeuvre in helping to stabilise the economy during the coronavirus
pandemic. They supplied the economy with additional liquidity and kept interest rates low.
Besides the monetary policy measures, the fiscal policy support packages, some of which were
sizeable, also had an expansionary effect. This made it possible to limit the severe economic
downturn caused by the pandemic, and facilitated a rapid recovery. However, the support
measures and the associated expansion in liquidity, pent-up consumer demand and the supply
bottlenecks have subsequently led to increased inflationary pressure in many countries. And this
brings me to current monetary policy.
Impact of the war on current monetary policy
Many countries began 2022 with inflation rates that were already significantly higher than in the
recent past. Since then, the war and sanctions have led to an additional marked rise in energy
and commodity prices. Inflationary pressure has thus increased further worldwide. At the same
time, the war is impacting the real economy, and the scale of the consequences is still difficult to
assess. The current forecasts for inflation and growth are therefore very uncertain. Uncertainty
can in turn also influence the behaviour of economic agents and amplify the adverse effects of
the war.
This poses a number of questions for monetary policy. How broad and persistent is the current
inflationary pressure, and to what extent will the global economy be curbed? Will inflation also
spill over to goods and services not directly affected by the pandemic and the war? And will
salaries also begin to rise, thus starting a classic wage-price spiral?
In some countries there are already signs of firming inflation dynamics, prompting certain central
banks to begin tightening their monetary policy. I will come to the monetary policy situation in
Switzerland shortly, but I would first like to talk briefly about economic growth.
The closer a country's trade relations were with Ukraine and Russia, the stronger are the direct
adverse effects now on growth, of course. However, owing to global interconnectedness, the war
is also throwing sand in the gears of countries with few trade links in the region. All of this slows
the economy, also here in Switzerland. For the current year, we anticipate that Swiss GDP will
grow by 2.5%. This is half a percentage point lower than we expected before the war broke out.
Inflationary pressure has risen in Switzerland, too, albeit comparatively moderately thus far.
Annual average inflation for 2021 was still at 0.6%; in March 2022 it stood at 2.4%. We define
price stability as a situation in which inflation lies between 0% and 2% over the medium term.
At our most recent monetary policy assessment in March, we decided to leave our policy rate
unchanged at -0.75%, and to maintain our willingness to intervene in the foreign exchange
market as necessary. However, we had already stressed in December that we would allow the
Swiss franc to appreciate to a certain extent. So how do we put our current monetary policy in
context?
We intervene in the foreign exchange market when strong upward pressure on the Swiss franc
would lead to persistently negative inflation and weigh heavily on the economy. However, we do
not react mechanically to every instance of upward pressure. If you have followed the Swiss
franc closely over the past months, you will know that it has gradually appreciated and has at
times even fallen below parity to the euro.
We have quite deliberately allowed this to happen. The reason is that inflation abroad is
significantly higher than in Switzerland. This means that our economy can withstand the franc
being stronger in nominal terms. The higher prices abroad and the nominally stronger Swiss
franc roughly balance one another out, and there has therefore been hardly any change in the
real exchange rate over the past quarters. Without the nominal appreciation of recent months,
our monetary policy would have become more expansionary. Given the current development of
inflation, that would not have been appropriate. Allowing the appreciation helped us to keep
inflation comparatively low in Switzerland.
Why did we not simply raise our policy rate? Two reasons have spoken against such a measure
to date. First, inflationary pressure is moderate here in Switzerland. Second, inflation is likely to
return to the range compatible with price stability in the foreseeable future. Thus far we have
seen hardly any indication of a broad spillover of the rise in commodity prices to the prices of
other goods and services. Accordingly, our inflation forecast indicates that inflation will average
2.1% in the current year, and decline again in 2023 and 2024. The monetary conditions are
therefore appropriate at present. However, should there be signs of a strengthening and spread
in inflationary pressure, we will not hesitate to take the necessary measures to ensure price
stability in Switzerland in the medium term.
Possible longer-term consequences of the war for monetary policy
So much for monetary policy today. However, what could be the longer-term consequences of
the war? One key issue in my view is how we are going to deal going forward with the
dependencies that have arisen as a result of globalisation. Specifically, which countries will still
trade with each other in which goods and services and to what extent?
We do not yet have definitive answers to these new questions. From the current perspective,
however, it appears possible that in the medium term we will be living in a world that is
less integrated than it is today. I would like to focus here on this question: What would a less
globalised world mean for monetary policy?
There would initially be the impact on inflation and the economy, in other words on the two
variables at the core of monetary policy. With a reduction in the division of labour owing to a
fragmentation of the global economy, production costs for many goods would rise again. As long
as this disintegration persisted, it would be likely to trigger more protracted inflationary pressure.
Furthermore, a fragmentation of the global economy would probably lead to more frequent
bottleneck situations, since changes in demand would once again increasingly affect domestic
economies and it would be less possible for these changes to be absorbed by the global
economy. As a result, inflation and the economy would also become more volatile again. All of
this means that monetary policy would have to be focused on tackling inflation more frequently
and intensively than in recent years.
Moreover, the use of monetary policy instruments could also be affected. Would the traditional
instrument of interest rates be used again more often, or would unconventional measures
continue to play an important role in countering the impact of adverse disruptions? This primarily
depends on whether the neutral interest rate remains low or returns to a higher level. Both of
these developments are conceivable. The neutral level of interest rates could rise and the
traditional interest rate policy could return to the fore if there were to be a reduction in the
investment of savings from the emerging economies in the advanced economies. The neutral
level of interest rates would also rise if defence spending and investment in energy infrastructure
were to increase government debt or if inflation were to remain high. On the other hand, however,
the neutral level of interest rates could also persist at the low level of the past 15 years if there
were to be an increase in saving due to the geopolitical uncertainty or if inflation were to decline
again. Central banks will have to be vigilant here in order to discern the effects of these various
forces in good time and contextualise them correctly.
Ultimately, another aspect that must not be forgotten is the political pressure that increasing
government debt, for example, could entail. Political opposition to monetary policy tightening is
likely to mount if the level of government debt is high. If central banks are to continue to be able to
ensure price stability in this situation, their independence must remain safeguarded.
Closing remarks
Ladies and gentlemen, I come to my concluding remarks. Today's geopolitical situation would
have seemed unthinkable at last year's general meeting. The long-term consequences of the war
in Ukraine for the structure of the global economy and thus also for monetary policy are still
difficult to assess at present. That said, one thing already seems clear: the challenges for
monetary policy remain manifold. We will have to work intensively on dealing with them to ensure
price stability going forward. This is the most important contribution that the Swiss National Bank
can make to the well-being of Switzerland's citizens.