Speech
Embargo
26 April 2019, 10.00 am
Monetary policy in the interests of the country as a whole
111th Ordinary General Meeting of Shareholders
of the Swiss National Bank
Thomas J. Jordan
Chairman of the Governing Board
Swiss National Bank
Berne, 26 April 2019
© Swiss National Bank (speech given in German)
Mr President of the Bank Council
Dear Shareholders
Dear Guests
A warm welcome to you all to our Annual General Meeting. Engaging with the general public
across Switzerland is very important for us. It therefore gives me great pleasure to speak
before you here today, and I hope I will have the opportunity to talk with as many of our
shareholders as possible over refreshments afterwards.
In my position as Chairman of the Swiss National Bank's Governing Board, I receive a lot of
correspondence from people throughout our country. In one such letter, the owner of a family
business in northwestern Switzerland described how she had struggled for years to hold on to
customers, only to have to now close down anyway as the strength of the franc has made
competition from neighbouring countries simply too great. In another letter someone wrote
that despite his having had to pay ever higher pension fund contributions over the past 15
years, there has been no increase in his projected retirement savings. In fact, they have even
declined. He attributes this to what he refers to as 'minus interest'.
Ladies and Gentlemen, letters such as these give us a picture of the key issues of the day for
people in Switzerland, and how their lives are affected by specific economic circumstances.
We always find this informative. However, the SNB's monetary policy can never be focused
solely on individual needs and concerns. Instead it must serve the interests of the country as a
whole. And unfortunately, you can't have your cake and eat it, as the saying goes. Or in the
case of the two letters I quoted, you can't have higher interest rates and a weaker Swiss franc
at the same time.
The SNB bases its monetary policy on careful consideration of its impact on the overall
economy. For some four years now, we have centred on two key elements: the negative
interest rate and our willingness to intervene in the foreign exchange market as necessary.
The first of these in particular is a very unusual concept for many of our fellow citizens, and
this is also reflected in the correspondence we receive. Some say that it runs contrary to
economic logic, and creates major problems for savers and pension funds.
Against the current backdrop, both the negative interest rate and our willingness to intervene
in the foreign exchange market as necessary remain essential, however. This is the only way
we can maintain the interest rate and exchange rate conditions in Switzerland that are
necessary for us to perform our task of ensuring price stability while taking due account of
economic developments. We would not charge negative interest if we did not regard this as
being absolutely crucial for us in fulfilling our mandate.
It is of great importance to us for the Swiss people to understand why our current monetary
policy is appropriate in its full context, and what impact it has for Switzerland as a whole.
Protracted decline in global interest rates
To explain to you why the negative interest rate is necessary, I need to take a broader
perspective and look back at the past quarter of a century. The level of interest rates has fallen
markedly worldwide over this period. Chart 1 shows that the nominal yields on 10-year
government bonds in Switzerland, Germany and the US have been declining since the 1990s.
There are various factors behind this downward movement.
The first of these is the success central banks have had in their efforts to combat inflation.
After the negative experiences with high inflation rates in the 1970s and 1980s, at the
beginning of the 1990s many central banks started striving to achieve price stability. Inflation
subsequently fell, and so too did the rates of interest on savings accounts and financial market
yields. After all, if the money on a savings account retains its value thanks to inflation being
lower, the interest no longer needs to compensate for any erosion in value. Lower inflation
and the attendant decline in the level of nominal interest rates are essentially a positive
development for households and companies alike.
A second explanation is the decline in real rates, that is to say nominal rates of interest
adjusted for inflation. Chart 2 shows 10-year government bond yields in Switzerland,
Germany and the US adjusted for consumer price inflation in those countries. The decline in
real interest rates worldwide is attributable to various reasons that have been studied and
analysed extensively. In simple terms, we can for example say that the demographic shift has
played a key role, with an ageing population tending to save more in light of longer life
expectancy. Moreover, the slowdown in productivity growth is curbing the potential return on
real investment, thus diminishing the appeal of investments in fixed assets such as factories
and equipment. If intentions with regard to saving outstrip investment plans, the real rate of
interest has to come down to restore the equilibrium between supply and demand for capital.
Monetary policy amid low interest rates
What does the lower level of interest rates worldwide mean when it comes to conventional
monetary policy? If interest rates are already low, monetary policy is less able to respond to
shocks. If the economy and inflation weaken, a central bank will normally stimulate economic
activity by lowering interest rates. This mitigates the slowdown and stabilises prices. If
interest rates are already low, however, a central bank only has a few moves at its disposal
before rates reach zero. And once that happens, conventional monetary policy ends.
The restrictions on the latitude of conventional monetary policy are even more pronounced in
the case of Switzerland. Indeed, our country has traditionally been known for its political and
economic stability, and the Swiss franc is thus viewed by investors as being particularly safe.
In return for this security, they are prepared to hold investments in Swiss francs at lower rates
of interest than they would in other currencies. This has in the past led to interest rates in
Switzerland generally being lower than in other countries. Therefore if monetary policy
needed to be eased, the starting point for interest rate cuts was correspondingly lower here
than elsewhere.
Monetary policy reaction to the major economic crisis
Ladies and Gentlemen, the global financial and economic crisis broke out eleven years ago,
and was followed by a marked decline in economic output and inflation. At that time, the
SNB had to switch to an expansionary monetary policy stance in order to fulfil its mandate.
We initially responded with conventional measures, and quickly lowered interest rates to
virtually zero.
The global financial crisis was swiftly followed by the sovereign debt crisis in the euro area.
The attendant uncertainty on the financial markets bolstered demand for the Swiss franc as a
safe haven, thus putting appreciation pressure on our currency. To counter these upward
forces, we had no option but to resort to unconventional means. We intervened on the foreign
exchange market, and in September 2011 introduced a minimum exchange rate against the
euro.
From mid-2014 onwards, the international monetary policy environment began to change. On
the one hand there were increasingly clearer signs that the US was about to adopt a tightening
stance, whereas in the euro area a loosening of monetary policy was becoming more and more
likely. The euro subsequently depreciated markedly against the major currencies. As a result,
by the beginning of 2015 the minimum exchange rate was no longer sustainable. To retain
control over our monetary policy, we therefore decided in January 2015 to change tack.
In that exceptional situation, we had to weigh up the pros and cons of using alternative
unconventional instruments. It became apparent that we would have to lower interest rates
below zero given that various other central banks had already done so. This was the only way
we could limit the appeal of the Swiss franc. When we discontinued the minimum exchange
rate, we thus also imposed negative interest of -0.75% on banks' sight deposits held at the
SNB. This then brought the level of interest rates in Switzerland back down below that in
other countries. Coupled with our willingness to intervene in the foreign exchange market as
necessary, the negative interest rate has taken the pressure off the Swiss franc and prevented a
sharp drop in inflation.
Broad impact on the economy
All in all, the Swiss economy got off relatively lightly compared with other countries in the
difficult years following the global financial crisis - and this despite the fact that, as a small
open economy with a large financial sector, we were hit hard by the shocks. This can be
mainly attributed to two factors. First of these was the remarkable flexibility of Swiss
companies and workers, which made it possible to increase efficiency, develop new products,
and tap into new markets. Coupled with this, the SNB's unconventional monetary policy
substantially cushioned the blow of external shocks. The real trade-weighted exchange rate of
the Swiss franc has thus remained fairly stable since September 2011. Were it not for the
negative interest rate and the extensive interventions by the SNB, Switzerland would today be
facing a different economic reality. The franc would have become much stronger, inflation
would have fallen well below zero, growth would have slowed abruptly and unemployment
would have risen markedly.
For us there is thus no question that the negative interest rate was significant in helping
Switzerland emerge from a difficult period in good shape. And it is still making an essential
contribution to ensuring that our economy continues to fare well today, despite the array of
uncertainties worldwide.
But how exactly does negative interest work? Negative interest rates take effect on an
economy in a very similar way to a monetary policy with positive rates. Having interest rates
slightly below zero does not mean the world has been turned on its head, nor does it run
contrary to economic logic.
Introducing the negative interest rate has on the one hand influenced the financing conditions
in the economy. This has been to the benefit of companies, households and the public sector
alike. Meanwhile, it also has an effect via the exchange rate, and this is particularly important
for us as a small open economy. Charging negative interest reduces the appeal of Swiss franc
investments compared with investments in other currencies, and thus plays a significant role
in keeping the appreciation pressure on our currency in check. This in turn supports economic
activity and is essential for price stability in the current situation. Exchange rates are, of
course, also influenced by other factors. However, the comparison between yields on Swiss
franc investments and those in other currencies is always an important criterion for investors
when deciding which currency to invest in.
Knock-on effects of low interest rates
That being said, the low level of interest rates does also pose challenges and there are
knockon effects. Savers in Switzerland are worried about their savings which are yielding barely
any interest. Pension funds and life insurers are facing difficulties in meeting their
contractually agreed obligations owing to the low level of capital market interest rates. And
banks are concerned about their profitability since they are generating less interest income
from their lending business. The low interest rate environment is also bolstering momentum
on the real estate markets.
However, with all of these problems it is not so much the negative interest rate itself that is a
major factor, but rather the exceptionally low level of interest rates that has prevailed
worldwide for years, and which I referred to at the beginning of my speech. These challenges
did not appear only when the SNB started charging negative interest, but rather reflect the
protracted decline in global interest rates. In the current situation, interest rates would remain
low even if we were to stop charging negative interest, and the knock-on effects would thus
also persist.
Safeguarding Switzerland
Ladies and Gentlemen, would the citizens of Switzerland be better off if the SNB did not
impose its negative interest rate? Allow me to play through a brief scenario in this regard.
What would happen if we were to simply stop charging negative interest in the current
environment?
Dispensing with the negative interest rate would have a substantial impact on the Swiss
economy. Swiss short-term interest rates would again be higher than in other countries, which
would clearly increase the attractiveness of Swiss franc investments. This is turn would cause
the franc to appreciate, which would be detrimental to economic momentum in Switzerland
and would see unemployment rise and inflation pushed into negative territory.
If we stopped charging negative interest, would that at least be beneficial for savers, pension
funds, life insurers and banks? The marked weakening in the economy would cast a pall over
the earnings prospects of Swiss companies, and Swiss equities would come under pressure.
Although short-term interest rates in Switzerland would no longer be negative, there would be
little change in capital market interest rates owing to the deterioration in the economic
outlook. All in all, the level of interest rates would thus remain low, and so too would the
yields on long-term Swiss franc bonds. Ultimately, there would be scarcely any significant
improvement for savers, pension funds, life insurers and banks.
The same goes for the real estate market. Although its momentum would be curbed somewhat
if we were to cease charging negative interest, there would be little change in the low level of
interest rates and the impact would therefore be limited. In the current situation, the risks to
financial stability must be addressed with focused macroprudential measures. This will then
curb demand for mortgages and real estate and strengthen banks' resilience.
Ladies and Gentlemen, abandoning the negative interest rate in the current environment
would weigh heavily on the Swiss economy. This would not help either savers or pension
funds, nor would it be beneficial for financial stability. In other words, as things stand at
present, removing the negative interest rate would not be in the interests of our country as a
whole.
Focusing on the big picture
We introduced the negative interest rate after careful consideration of the advantages and
disadvantages. We continually assess its effectiveness, and objectively analyse the costs and
benefits.
Global economic activity has weakened in recent months. Although GDP growth is likely to
pick up again somewhat after stagnating in the second half of 2018, the inflation outlook for
this year and next is subdued. In addition to this, given the economic and political uncertainty
in many countries, the situation on the financial and foreign exchange markets remains
fragile.
Against the current backdrop, our unconventional monetary policy with the negative interest
rate and our willingness to intervene in the foreign exchange market as necessary remains
both essential and appropriate. And this is in part also because it does not attach greater
weight to any individual issues over others, and is instead at all times focused on the interests
of Switzerland as a whole.
The negative interest rate has its place among the instruments at the SNB's disposal, which
include conventional and unconventional measures alike. It is incumbent on us to use the
instruments best suited to tackling the situation at hand. However, I would like to stress one
thing: I am convinced that we will at some point return to positive interest rates. I cannot tell
you now when exactly that will be. This will hinge on developments in inflation, growth and
exchange rates going forward.
Ladies and Gentlemen, allow me to conclude by taking this opportunity, also on behalf of my
Governing Board colleagues Fritz Zurbrügg and Andréa Maechler, to thank our employees for
their hard work and dedication. Our gratitude also goes to you, our shareholders, for your
loyalty to the SNB and your faithful support. Thanks also to our young guests from the
Cantonal School of Graubünden for their interest in monetary policy and the SNB.
I would like to thank you all for your attention, and I look forward to talking with as many of
you as possible over refreshments later.
Chart 1
Chart 2