Jean-Pierre Roth: Recent economic and financial developments in Switzerland Introductory remarks by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the end-of-year media news conference, Zurich, 11 December 2008. *  *  *  Our assessment of the economic and monetary situation has changed considerably since our last assessment of 18 September 2008. Already back then, we had emphasised that there were substantial risks attached to developments in the global economy, in financial markets and in energy prices. We had also stressed that our forecasts for economic activity and inflation in Switzerland involved considerable uncertainties. We had announced our intention to monitor developments closely, in order to react swiftly should the need arise. As you know, this eventuality did indeed materialise. This led us to relax monetary policy decisively as the uncertainties faded and the deterioration in the economic situation became more concrete. We first lowered the Libor target range on 8 October, by 25 basis points; then on 6 November, by 50 points; and a third time on 20 November, by 100 points. With the new cut announced today, the Libor target range now lies between 0% and 1%, reflecting a firmly expansionary monetary policy. Today’s press conference gives me the opportunity to explain in detail the rationale behind our actions. Since our assessment of 18 September, the situation has changed in three key areas.

A predictable monetary policy, focused on a clearly defined inflation target, provides good guidance for wage negotiations. One of the main reasons why wage formation did not function satisfactorily during most of the 1980s was probably that stabilisation policy did not work. Inflation exceeded the official target on several occasions in that period and the labour market organisations had difficulty in discerning the rules of the game. One example of this is the government ambition of bringing inflation down in the mid-1980s: a crisis package was presented in 1983, aimed at inflation rates of 4% in 1994 and 3% in 1995; when inflation exceeded these targets, the employee organisations considered that a 5% ceiling on wage increases was no longer acceptable. Today’s confidence in the Riksbank’s current inflation target facilitates wage negotiations. The 1997 wage round, for instance, took the 2% inflation target as a starting point. The development of wages is always a central factor in inflation assessments, but the difficulties involved in forecasting wages are considerable. The indicators used by the Riksbank include data on wages and unit labour costs, shortage figures (bottlenecks) at industry level, wage drift and unemployment relative to unfilled job vacancies. Another factor of importance for monetary policy is the equilibrium level of unemployment, that is, the level of unemployment that is compatible with stable inflation. Attempts to push unemployment down below the equilibrium level with the aid of monetary stimuli are liable to just boost inflation. Maintaining an expansionary monetary stance cannot therefore generate permanently higher employment.