speech embargo 30 may 2024, 2. 00 am the natural rate of interest ( r * ) as a reference point for monetary policy – a practitioner ’ s view keynote speech at the 2024 bank of korea international conference thomas j. jordan * chairman of the governing board swiss national bank seoul, 30 may 2024 © swiss national bank * the speaker would like to thank matthias burgert for his support in preparing this speech. he also thanks claudia aebersold, alain gabler, christian grisse, carlos lenz, alexander perruchoud, petra tschudin and tanja zehnder, as well as the snb language services. page 1 / 11 ladies and gentlemen i am delighted to be here today in seoul to address such a distinguished audience. i would like to thank governor rhee for inviting me to give this keynote speech. the topic of this year ’ s bank of korea international conference – ‘ the evolution of the natural interest rate and its implications for the global economy ’ – could not have come at a better time. monetary tightening over the past two years has lifted policy rates and longerterm interest rates from their historical lows. there are reasons to believe that some of the structural drivers of real interest rates have also changed direction in recent years. a lively debate has emerged on whether real interest rates will return to their pre - pandemic levels, or whether they will remain higher because the natural rate of interest, r *, has increased. 1 over the past years, r * has become an important reference point for monetary policy. the difference between the real interest rate and r * gives a measure of a central bank ’ s monetary policy stance. therefore, r * estimates help in evaluating different monetary policy options. however, the measurement of r * is subject to high uncertainty. today i would like to focus mainly on how policymakers can nevertheless make use of r * estimates in practice. in the first part of my remarks, i will briefly review the developments in real interest rates over the past decades. i will then turn to the concept of r * itself. in the second part, i will discuss how policymakers can use r * in practice to assess the monetary policy stance, and in particular, how they can deal with the inherent uncertainty in r * estimates. here i will draw especially on the swiss national bank ’ s experience. developments in real interest rates let me begin by looking at the long - term trends in real interest rates. real interest

, which we could counteract by selling foreign exchange. in summary, a risk management approach is essential for central banks to handle uncertainty effectively. ultimately, our decisions are guided by our mandate of ensuring price stability. before concluding, let me briefly review how the snb ’ s definition of price stability in our monetary policy strategy also helps us to deal with uncertainty, including that related to r *. cf. jordan ( 2019, 2022a ). cf. jordan ( 2022b, 2023 ). page 6 / 11 flexibility in monetary policy strategy in our monetary policy strategy, we define price stability as a rise in consumer prices of less than 2 % per year. deflation – that is to say a sustained decrease in the price level – also breaches the objective of price stability. we do not have a point target for inflation and thus we do not seek to achieve a specific value between 0 % and 2 %. furthermore, we focus on the medium - term inflation outlook, which means that negative inflation or inflation rates in excess of 2 % can be temporarily tolerated. this definition allows us to respond flexibly to external shocks and to weigh up the costs and benefits of alternative monetary policy measures. as a small open economy, switzerland is highly exposed to disruptions from abroad. our definition of price stability as a range rather than a point target also helps in dealing with uncertainty related to r *. let me illustrate this by returning to our most recent monetary policy decision. as shown in chart 3, our latest conditional inflation forecast sees inflation between 1 % and 1. 5 %. this is based on the assumption of a constant snb policy rate of 1. 5 % over the entire forecasting horizon. it also takes into account our estimate that r * is around 0 %. there are currently reasons to believe that r * has increased somewhat, or might rise over the coming years. we view this as a small upward risk to the inflation forecast. if this risk were to materialise, our monetary policy stance would be more accommodative than intended. this would lead to somewhat higher inflation in the medium term than currently projected. since we can let inflation fluctuate within the range of price stability, the current monetary policy would most likely still be compatible with price stability, even if r * was slightly higher. thus, with price stability defined in terms of a range for inflation, we have more time to properly evaluate potential changes in r *. to summarise, our definition