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 European Central Bank’s monetary policy Against the recent backdrop of high inflationary pressures, the European Central Bank (ECB) has continued with the normalisation of its monetary policy initiated last December. The Governing Council has explicitly expressed its willingness to maintain optionality, gradualism and flexibility in the conduct of monetary policy going forward. In the current climate of uncertainty, this is deemed necessary to allow us to respond to  incoming data to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability. Indeed, the war in Ukraine is increasing the short-term upward inflationary dynamics, adding to the pressures generated by rising energy prices, bottlenecks and the normalisation of demand. The intensification and prolongation of these short-term inflationary pressures make it more likely that second-round effects will emerge and, therefore, that the inflation dynamics will become entrenched in the medium term. However, the war is having an adverse effect on economic growth, which could potentially be significant, particularly in the short term, in a setting where euro area GDP remains below its potential level. Overall, the upside risks to the inflation outlook have intensified, particularly in the near term. Although various indicators of long-term inflation expectations drawn from financial markets and surveys of professional forecasters put inflation at around 2%, there are preliminary signs, which will have to be monitored carefully, of those indicators being revised to above-target levels. In step with the normalisation of monetary policy, net purchases under the pandemic emergency purchase programme (PEPP) were discontinued on 31 March.