Nonetheless, of all the possible links between financial stability and the other objectives of macroeconomic policy, it is the one between the two key functions of central banks - price stability and financial stability - which has received most attention. And this for very good reasons. For a start, we know from experience that inflation brings about distortions in the allocation of resources, and such misallocation is incompatible with the achievement of financial stability on a sustainable basis. We have also learnt that the efficiency of monetary policy depends on the effectiveness of the transmission channels. Central banks can only influence short-term interest rates. The ultimate impact on prices of monetary policy decisions travels over time through various channels in the financial system, and uncertainty could ensue if these do not function efficiently. Another reason for this focus of attention could be that while the supervisory function has been relocated outside central banks in many countries, responsibility for the maintenance of systemic stability remains with central banks. The relationship between financial and monetary stability is not, however, necessarily limited to complementarities. In a situation characterised by both rising inflationary pressures and tight liquidity conditions, for example, a decision to raise interest rates would be consistent with the central bank’s price stability objective but could also affect the profitability of credit institutions. It is thus hardly surprising that one of the topical issues facing central banks today concerns the appropriate weight that should be given to financial stability considerations in the formulation of monetary policy.

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 half-yearly media news conference, Berne, 14 June 2007. *  *  *  The Swiss National Bank is raising the target range for the three-month Libor with immediate effect by 0.25 percentage points to 2.00–3.00%. With this move, the National Bank is ensuring that inflation prospects remain favourable. The SNB intends to hold the rate in the middle of the target range for the time being. Switzerland's economy is in excellent shape. Indeed, the economy is developing even better than expected back in March. For 2007, the National Bank now expects real GDP to grow at a rate of close to 2.5%. The healthy economy in the neighbouring countries and exchange rate developments have been contributing factors. Together with a renewed rise in oil prices, this has led to a slight deterioration in inflation prospects – even after today's increase in the interest rate. Assuming that the three-month Libor remains unchanged at 2.50%, the National Bank expects an average annual inflation rate of 0.8% in 2007, 1.5% in 2008, and 1.7% in 2009. Consequently, forecast inflation continues to rise. However, at present there is considerable uncertainty with regard to the assessment of the inflation outlook. On the one hand, structural changes in the economy still have a dampening effect on prices.