Thomas Jordan: The Swiss economy and global economic outlook
Introductory remarks by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss
National Bank, at the Media News Conference of the Swiss National Bank, Berne,
14 June 2012.
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The Swiss National Bank (SNB) will maintain the minimum exchange rate of CHF 1.20 per
euro and will enforce it with the utmost determination. It remains prepared to buy foreign
currency in unlimited quantities for this purpose. Even at the current rate, the Swiss franc is
still high. Another appreciation would have a serious impact on both prices and the economy
in Switzerland. The SNB will not tolerate this. If necessary, it stands ready to take further
measures at any time.
The target range for the three-month Libor remains at 0.00-0.25%. Essentially, the SNB's
conditional inflation forecast is unchanged from its March forecast. It is based on a
threemonth Libor of 0.0% and continues to assume that the Swiss franc will weaken over the
forecast horizon. For 2012, the forecast shows an inflation rate of -0.5%. For 2013, the SNB
is expecting inflation of 0.3% and for 2014, of 0.6%. Consequently, in the foreseeable future,
there is no risk of inflation in Switzerland.
The SNB expects that the global economy will only recover slowly. While the emerging
economies make a major contribution to global growth, momentum in the advanced
economies will remain subdued. In Europe, in particular, economic activity will be extremely
weak on account of the financial and debt crisis. Switzerland will experience a significant
economic slowdown over the rest of the year. Only because of the unexpectedly strong
winter half-year does the SNB now expect growth of around 1.5% for 2012.
The risks for the Swiss economic situation remain exceptionally high. The uncertainty about
future developments in the euro area has again risen. If global activity proves disappointing
or the turmoil on the financial markets increases, downside risks will again emerge for the
economy and price stability in Switzerland. The imbalances in the Swiss residential mortgage
and real estate markets increased further last quarter. Consequently, the SNB welcomes the
Federal Council decision to make available a countercyclical capital buffer which can counter
adverse developments on the domestic credit market.
Global economic outlook
Let us examine the economic outlook and the inflation prospects in a little more detail. In the
first quarter of 2012, the global economy continued to grow at a moderate pace although this
varied considerably from one region to another. The emerging economies were still making a
major contribution to global growth. By contrast, overall momentum in the advanced
economies was subdued, although here, too, differences from one country to another were
considerable. Japan experienced strong growth in the first quarter due to a catch-up effect. In
the US, momentum was moderate. In the euro area, a number of countries are in deep
recession, while in Germany, GDP continued to expand strongly. Overall, the economy in the
euro area stagnated.
As in the last monetary policy assessment, we assume that the global economy will continue
to recover slowly. This will be driven by globally expansionary monetary policy and strong
domestic demand in the emerging economies. In the euro area and the US, developments
are likely to be more subdued. Here we assume that the European financial and sovereign
debt crisis will gradually ease. However, risks in this respect remain high. In particular, the
difficult situation in Greece and Spain has already led to a significant deterioration in the
confidence of households and companies in the euro area. As a result, the economic
situation remains vulnerable.
These high risks are also affecting the financial markets. Following a temporary recovery at
the beginning of the year, the situation on the financial markets at present is again tense. A
substantial correction has taken place on the share markets. By contrast, investments
perceived to be safe, such as US, German or UK government bonds, recorded all-time low
yields and correspondingly high price gains. Real yields on these investments are in negative
territory for most maturities, measured in terms of inflation expectations. In addition, interest
rates on money markets are at record-low levels worldwide.
Swiss economic outlook
In Switzerland, real GDP rose faster than expected in the first quarter. The stabilising effect
of the minimum exchange rate against the euro played a major role in this development, with
goods exports declining only slightly in the first quarter, in an international environment that
remained weak, while exports of services rose. An improvement in consumer confidence
encouraged a substantial increase in private consumer spending. However, GDP growth was
also supported by temporary effects. Value added in the banking industry benefited from the
optimistic mood on the financial markets during the first months of the year. In manufacturing
and the hospitality industry, however, activity declined, underscoring the particularly negative
impact of the strong Swiss franc on these industries.
For the second quarter, we expect a significant slowdown in GDP growth. Since the global
economy is expected to recover slowly, and the value of the Swiss franc is still high, the
demand for exports is likely to remain subdued, even in the subsequent period. The high
level of uncertainty and the pressure on profit margins are impacting negatively on corporate
investment. Only because of the unexpectedly strong winter half-year does the SNB now
expect growth of around 1.5% for 2012.
Swiss inflation outlook
The inflation outlook for Switzerland has remained largely unchanged from the monetary
policy assessment in March. Since the fourth quarter of 2011, the annual inflation rate has
been in negative territory. This is mainly attributable to a base effect, because last quarter
the price level remained almost unchanged from the previous quarter. Thus the minimum
exchange rate has put a halt to the deflationary situation that had arisen as a result of the
strong appreciation of the Swiss franc last summer. Surveys on inflation expectations confirm
that deflation is not expected at present. As the surveys also show, there continues to be no
danger of inflation. This corresponds to our conditional inflation forecast which reaches 0.8%
at the end of the three-year forecast horizon. Overall, the path of inflation is again more
subdued than in the March forecast, due to the fact that the Swiss franc is weakening less
rapidly than was forecast at that time.
Monetary and financial conditions
Let us now turn to monetary and financial conditions. These are virtually unchanged from the
first quarter of 2012. After the March monetary policy assessment, the euro remained more
or less stable against the major currencies. Since the beginning of May, it has weakened by
around 5% against the US dollar. As a result, the Swiss franc has depreciated slightly in
export-weighted terms, even if the exchange rate has remained unchanged with regard to
the euro.
Interest rates in the Swiss franc money market continue to fluctuate around zero. In the past
quarter, the Libor persisted at a very low level, at around 10 basis points. For the foreseeable
future, interest rate expectations remain exceptionally low, and levels of interest rates on
futures - derived from Libor futures contracts - are in fact, in some cases, substantially
below zero.
Yields on bonds with high credit ratings are also very low in Switzerland. At the beginning of
June, ten-year Confederation bonds attained a new all-time low, at around 0.5%. Thirty-year
bonds were trading in the market at yields of under 1%. For short to medium-term maturities,
yields were in negative territory, in some cases very negative.
The low interest rates continue to be reflected in robust growth in lending and rising real
estate prices. As a result, the imbalances on the Swiss residential mortgage and real estate
markets have increased further. Following my presentation, my colleague Jean-Pierre
Danthine will take a closer look at the risks for financial stability in connection with the
mortgage and real estate markets.
SNB monetary policy
Let us now return to the SNB's monetary policy. The debt problems in some euro area
countries have deteriorated seriously over the recent period. Accordingly, the euro has lost
value against most countries since May. This has led to increased upward pressure on the
EUR/CHF exchange rate. Even in this difficult environment, we have consistently enforced
the minimum exchange rate of CHF 1.20 per euro.
To defend the minimum exchange rate, we purchased foreign currency. This has led to a
further expansion in Swiss franc liquidity and the SNB balance sheet. Even when the
minimum exchange rate was first introduced, we drew attention to the fact that its
enforcement could have significant consequences for our balance sheet. Another
appreciation of the Swiss franc would constitute a very substantial threat to the Swiss
economy and the risk of deflationary developments coming about. This is why it is necessary
to accept an expansion of the balance sheet arising out of the enforcement of the minimum
exchange rate. The SNB is in a position to bear the ensuing risks.
Even at a level of CHF 1.20 per euro, the Swiss franc is still high, presenting large parts of
our economy with a difficult situation. Consequently, we will continue to enforce the minimum
exchange rate with the utmost determination and will buy foreign currency in unlimited
quantities for this purpose. If necessary, we stand ready to take further measures at any
time.
Management of foreign currency investments
I will conclude today with a few comments about the management of our foreign currency
investments. In the recent period, this topic has returned to the spotlight of public discussion.
In particular, the possibility of establishing a sovereign wealth fund with the SNB's foreign
currency holdings has given rise to discussion. In this respect, it is important, first of all, to
point out that the SNB does not hold its foreign currency in the form of banknotes or bank
deposits. The funds are invested in different investment categories and currencies. For a
considerable period, the SNB has held not just the traditional instruments - government
bonds of countries with high credit ratings - but also bonds issued by private sector
borrowers and shares. Holdings of shares currently make up some 10% of foreign currency
investments.
In order to diversify its investments further, in 2010, the SNB included additional currencies
such as the Australian and Singapore dollars as well as the Swedish krona and Danish krone
in its investment universe. Since the first quarter of 2012, the SNB has also been investing in
the Korean won. Additional investment opportunities in the advanced and emerging
economies are continually being evaluated, both for bonds and for shares, although this is
subject to an adequate level of liquidity in the markets in question.
The idea of a sovereign wealth fund may appear attractive at first glance. However, in the
current situation, it does little to assist Switzerland or Swiss monetary policy. The sovereign
wealth funds in Norway and the oil states cannot serve as models for the management of the
SNB's currency reserves. All of them invest state income surplus derived from commodity
exports. A Swiss sovereign wealth fund funded from SNB foreign exchange, by contrast,
would be financed through money creation.
From our point of view, the three following points, in particular, speak against a sovereign
wealth fund. First, the creation of such a fund would not help to enforce the minimum
exchange rate. The only decisive factor is the SNB's willingness to buy foreign currency in
unlimited quantities against Swiss francs. Second, all investments abroad are subject to an
exchange rate risk, whether they be government bonds, shares, real estate, commodities or
investments in infrastructure, and irrespective of whether they appear on the SNB balance
sheet or on that of a separate sovereign wealth fund. Consequently, outsourcing the foreign
currency investments would not reduce Switzerland's exchange rate risk. Third, outsourcing
the foreign exchange to a sovereign wealth fund would call into question the independence
of monetary policy and the SNB, as well as the freedom of action for monetary policy. The
size and composition of the SNB's balance sheet are a reflection of monetary policy. The
SNB must also be in a position to dispose of the assets it has purchased and determine the
composition of its balance sheet as required. Only in this way can it conduct an independent
and target-oriented monetary policy.