significant progress in disinflation in the past years by bringing their average inflation rates close to those of the euro area ( see slide 5 ). for each new member state, the chart shows the 12 - month average rate of hicp inflation in march 2006 ( which is the relevant measure for the convergence examination in the may convergence reports ), as well as the annual rate of inflation in march. at the same time, inflation rates have been rather volatile and diverse across countries. this is partly due to the fact that the new eu member states are mostly small and open economies, and are thus very exposed to changes in import prices, including energy prices. it is clear, however, that the dynamics of inflation in many of these countries, which are still undergoing significant structural changes, can be relatively complex, as they are influenced by certain specific factors relating to the catching - up process. these include the phenomena described by the balassasamuelson - effect, the changes in consumption patterns towards services and the convergence of real incomes. strong domestic demand growth accompanied by a tightening in labour markets, as observed in a number of countries, is likely to lead to wage pressures. finally, in many of the new member states, structural price adjustments, including changes in administered prices and the alignment of excise taxes with eu levels, are still ongoing. containing inflationary pressures under such circumstances is obviously a challenging task. it is therefore important that all policy instruments in the countries concerned – including monetary policy, fiscal policy and structural reforms – need to be employed to foster convergence, both in nominal and in real terms. with regard to the exchange rate stability criterion, the ecb has continuously stressed that the minimum stay in erm ii serves a very useful objective, namely to provide a “ testing room ” for various purposes. it allows to test a country ’ s ability to sustain a stable nominal exchange rate, especially of those undergoing deep structural transformations, where equilibrium exchange rates may change significantly over time, and it allows to test the eventual conversion rate. therefore, a longer stay than the required minimum of two years might be desirable for some countries. in most cases, the countries participating in erm ii have not experienced significant fluctuations in their currencies ( see slide 6 ). the charts show exchange rate developments since the beginning of 2005 within the standard + / - 15 % fluctuation band. these developments also reflect the fact that some of the erm ii participants have a currency board arrangement in place as a un

small open economy, in the wake of the financial crisis it was hit hard by the slump in global demand and the turbulence on the international financial markets. our country ’ s situation was exacerbated by strong upward pressure on the swiss franc. the rapid pace of the appreciation, and the resulting – at times massive – overvaluation of the swiss franc, heightened the economic challenges and gave rise to the threat of deflation. on the one hand, the appreciation reduced global demand for goods and services produced in switzerland, and the associated negative effects on the economy curbed inflation. on the other hand, the appreciation led directly to lower prices for imported consumer goods. owing to the high share of imports in switzerland, this weighed additionally on inflation. page 2 / 16 this pronounced appreciation pressure was attributable to two specific characteristics of switzerland. first, the traditionally low level of interest rates in switzerland meant that there was less leeway to the effective lower bound by international comparison. interest rates in switzerland are generally lower than abroad since the swiss franc is valued as a safe investment given switzerland ’ s long - standing political, fiscal and monetary stability. as central banks lowered interest rates significantly due to the global financial crisis, the interest rate differential between switzerland and other countries decreased, making the swiss franc comparatively more attractive. second, when risk sentiment deteriorates globally, our currency typically gains in value owing to its characteristic as a safe haven. this was especially the case during the financial crisis and the european sovereign debt crisis. heightened uncertainty worldwide following the outbreak of the coronavirus pandemic and russia ’ s attack on ukraine also increased upward pressure on the swiss franc. to ensure price stability over the medium term against this backdrop, the snb resorted to unconventional measures. we lowered our policy rate well into negative territory and intervened in the foreign exchange market, at times considerably. this led to a marked expansion of our balance sheet ( cf. chart 1 ). the use of foreign exchange market interventions was necessary given that the strong appreciation of the swiss franc was a direct source of the deflationary pressure in switzerland. furthermore, the scope for buying domestic bonds was limited given switzerland ’ s relatively small capital market. by lowering our policy rate to −0. 75 % and extensively intervening in the foreign exchange market, we were able to ensure price stability even in these difficult years. although there were phases when inflation slipped into negative territory, it always returned relatively quickly to positive values.