thomas jordan : financial crisis dispersing? economy changing direction? speech by mr thomas jordan, member of the governing board of the swiss national bank, at the general assembly of the handels - und industrieverein des kantons schwyz, schwyz, 25 august 2009. the complete speech can be found in german on the swiss national banka€™s website ( www. snb. ch ). * * * the situation on the international financial markets has recently brightened again. this is mainly due to the positive keynote in company earnings reports and a series of unexpectedly favourable economic data. the relaxation of monetary policy was pursued further through the implementation of unconventional measures in march 2009, and this is also likely to have had a calming effect. price advances since march should, however, be partly seen as corrections to excessive downward movements in the previous period. considerable uncertainties still prevail and the danger of setbacks should not be carelessly underestimated. the recessionary developments in the world economy weakened significantly in the second quarter of 2009. expansionary monetary policy around the world, together with fiscal support programmes, have probably played an important role in this respect. economic indicators are also showing a turn for the better in the swiss economy. nevertheless, in view of the exceedingly low level of utilisation of production capacity, industrial investment will probably continue falling. given the increasingly gloomy outlook for employment, private consumption is also likely to put a damper on the resumption of cyclical activity. consequently, the current overall situation of the swiss economy remains difficult despite the many rays of hope with regard to the economic cycle. also, the danger of deflation does not yet seem to have been entirely averted. we have not yet reached the moment for a change of direction in monetary policy in switzerland. after analysing the available economic data and forecasts and taking various risk considerations into account, there is no need for the snb to take monetary policy action at present. the snb can afford to adopt a holding stance. however, this holding stance should not be mistaken for inactivity. the snb continues its firm implementation of an extremely expansionary monetary policy and the unconventional measures launched on 12 march 2009. the swiss franc money market is still being provided with a generous and flexible supply of liquidity, interest rates remain low, swiss franc bonds are still being purchased to dampen the level of risk premiums on the swiss franc

measures taken by the ecb. however, the very low interest rates around the world are also associated with risks. the longer a low interest rate phase persists, the greater the potential danger of speculative price developments and misallocations. investors searching for yields could place increasing amounts in real estate, and this can lead, in particular, to a rise in real estate prices and thus, to a distorted pattern of incentives. momentum in the domestic residential mortgage and real estate markets remains exceptionally strong. mortgage lending continues to grow briskly compared to the economy as a whole. in addition, real estate prices, already at a high level, continued to rise. as a result, risks for financial stability increased further. my colleague, jean - pierre danthine, will give you an assessment of the situation in the financial sector from the point of view of the snb. monetary and investment policy the minimum exchange rate provides us with new challenges for our monetary policy but also for our investment policy. i would therefore like to close with a few words on our foreign currency investments. as you know, in the months may to august, in particular, we had to purchase large quantities of foreign currency in order to enforce the minimum exchange rate. consequently, the snb ’ s foreign currency investments have significantly increased. also, we cannot exclude the possibility that we will have to intervene substantially again. from the beginning we made it clear that enforcement of the minimum exchange rate was associated with risks. we are endeavouring to reduce the balance sheet risks through suitable diversification of our foreign currency investment. however, the exchange rate risk on the foreign exchange reserves is based on monetary policy considerations and the snb is therefore obliged to bear it. my colleague, fritz zurbrugg, will talk about the management of the foreign exchange reserves in his remarks. through its monetary policy, the snb serves as a buffer for the swiss economy and cushions the effect of severe shocks. because it has a long - term focus, it is in a position to carry substantial risks. this means we can react flexibly in exceptional situations in order to fulfil our mandate, which is to ensure price stability while taking due account of economic developments. bis central bankers ’ speeches