The specific monetary policy response adopted depends on a number of factors, some being immediately relevant for monetary policy, others only in the long term. As soon as new tariffs are announced, the question arises as to whether they are temporary or permanent, or whether they could even lead to a raft of protectionist measures. One-off increases in duties that are merely temporary in nature will similarly take only a temporary toll on the economy, and thus do not necessarily require any monetary policy reaction. What is significant in this context is the expectations of producers and consumers. Longerterm inflation expectations in particular are of pivotal importance for the monetary policy stance. Central banks have to respond differently depending on how economic actors adjust their expectations to take account of the higher tariffs. If inflation expectations are well anchored, that is to say very stable, central banks can choose to ignore temporarily higher inflation, and can thus concentrate fully on the negative growth effects triggered by protectionism. After all, if inflation expectations are well anchored, higher prices should not lead to a damaging wage-price spiral. Inflation would come back down again sooner or later. However, if consumers and producers expect the trade war to result in steadily rising prices, this would fuel upward inflationary pressure over the long term. In this case, monetary policy would have to be tightened to address the higher inflation expectations. The way in which exchange rates react to higher tariffs worldwide is also highly dependent on the expectations of economic actors.

Speech  Embargo 31 October 2018, 6.15 pm  Protectionism complicates monetary policy Volkswirtschaftliche Gesellschaft des Kantons Bern  Thomas J. Jordan Chairman of the Governing Board ∗ Swiss National Bank Berne, 31 October 2018 © Swiss National Bank, Zurich, 2018 (speech given in German)  ∗ The speaker would like to thank Claudia Aebersold Szalay and Alexander Perruchoud for their support in drafting this speech. He also thanks Simone Auer and Carlos Lenz as well as SNB Language Services. Page 1/9  Ladies and Gentlemen Switzerland owes much of the prosperity it enjoys today to open markets and thriving trade with many countries across the globe. In recent decades, free trade in goods and services, coupled with advancing technological progress, has delivered growth and prosperity, not just in Switzerland but in many other parts of the world, too. Recognising the advantages of international trade, most countries remained true to the principles of free trade even amid the outbreak of the financial crisis almost exactly ten years ago. They resisted the temptation of knee-jerk isolationist responses and refrained from sweeping protectionist measures. The onus was on not repeating the mistakes made in the Great Depression of the 1930s, when such interventions served only to accelerate the economic decline rather than bringing the hoped-for respite. As we now know, and as Chart 1 clearly shows, the consequences were disastrous. Recovery from the Great Depression was painfully slow, whereas world trade returned relatively quickly to its previous levels following the most recent crisis.