Heightened political uncertainty has, however, occasionally left its mark on the bond and foreign exchange markets. For instance, demand for highly rated government bonds has remained strong since the start of the year. In addition, despite largely positive economic data, the inflation outlook for the major advanced economies is still muted. As a result, yields on highly rated government bonds have changed only marginally since the beginning of 2017  Page 1/5  Berne, 15 June 2017 Andréa M. Maechler  News conference  and have remained low (cf. chart 3). In Switzerland, too, the yield on ten-year Confederation bonds has remained essentially unchanged. On the foreign exchange market, the Swiss franc experienced repeated episodes of upward pressure as a result of heightened political uncertainty in Europe. The elections in the Netherlands and France, as well as the UK’s upcoming Brexit negotiations with the EU, generated increased demand for currencies considered particularly safe by investors. After the presidential election in France, the euro strengthened and pressure on the Swiss franc subsided. Since the beginning of the year, the euro has gained around 3%. The Swiss franc is now trading close to where it was at the start of the year, and thus remains significantly overvalued. Despite ongoing normalisation of monetary policy in the US, the dollar has depreciated roughly 5%. Establishment of SARON as reference rate for interest rate derivatives  Let me now turn to innovations on the Swiss money market.

This would lead to more bargaining power, and hence less  BIS central bankers’ speeches  3  sensitive to exchange rate fluctuations. Stronger domestic consumer base would also help lessen the dependence on external demand. All reforms I mentioned require concerted efforts from all public and private stakeholders. Policymakers should provide economic environment and infrastructure conducive to reforms. Particularly, financial literacy and risk management awareness should be fostered at all levels and sectors. Financial institutions also play a crucial role in developing financial products to facilitate transactions and risk managements. Businesses should upgrade productivity to enhance industry’s resilience to shocks. Advanced preparations will surely pay off. Lessons learned, challenges ahead, and policy implications Ladies and Gentlemen, As we are approaching the end of my talk, let me now share some final thoughts on lessons learned and challenges ahead. First, for countries that want to maintain autonomy on interest rate policy, exchange rate flexibility is a pre-requisite to living with capital flows. Nevertheless, extreme exchange rate fluctuations may cause misalignments. A trade-off between flexibility and stability thus requires policymakers to identify the exchange rate framework suitable for the economy. This can be a daunting task in practice, as the target is often country-specific and subject to dynamic economic developments. Keep in mind that monetary policy can do little to influence real exchange rates in the long term. Attempts to give the exchange rate more weight in monetary policy deliberations will also reduce the autonomy in controlling interest rate, leading to more interest rate volatility.