1998 is very much dependent on how the economy develops over the next few months. financial market participants eager to bring forward the small, and conditional, easings shown in these projections clearly do so at their own risk! on the face of it, with inflation over the next two years, and especially over the next two quarters, being a little higher than we thought likely back in june, easing now by more than we foreshadowed in june may seem surprising. the explanation is straightforward, and relates to the lags inherent in the operation of monetary policy. while inflation is a little higher in the short term than we had previously expected, it is still well within our target range, and has been boosted by factors which should be essentially transitory, such as the impact of moving housing nz rentals to market. of more relevance to the outlook in 18 months to two years ’ time is the margin of spare capacity in the economy. that now looks somewhat larger than it did previously, and warrants somewhat easier monetary conditions. although activity will be accelerating through 1998, it is not until 1999 that the inflation pressures associated with strong growth begin to emerge. a gradual tightening of monetary conditions from mid - 1998 fits with that profile. there are, of course, alternative paths for monetary policy that could deliver inflation within our target range. as was discussed in june, one alternative path would involve more aggressive easing now, followed by earlier and more aggressive tightening next year. another path would involve holding conditions relatively flat at about current levels until the latter part of 1998 before beginning a somewhat gentler tightening beyond that date. inevitably, there is rather more art than science in selecting the best of these alternatives. what we have chosen reflects the risks that we see around us at present, and also reflects the benefits we see in providing a relatively smooth path for monetary conditions over time. the mix of monetary conditions on numerous occasions over the past year or two, i have indicated that the particular mix of monetary conditions was unhelpful - - that the exchange rate was too high, putting excessive pressure on exporters, and that interest rates remained too low to discourage borrowing for housing purposes, or to encourage increased domestic savings. the past quarter has seen a substantial, and welcome, shift in the mix of monetary conditions in the direction we believed appropriate. the fall in the exchange rate will boost the incomes of exporters and those competing with imports, and will ultimately increase export volumes. the projected improvement in the current account balance reflects that

thomas jordan : monetary policy in times of crisis. why central banks talk to one another summary of a speech by mr thomas jordan, chairman of the governing board of the swiss national bank, at the energie - apero etavis, zurich, 14 may 2012. the complete speech can be found in german on the swiss national bank ’ s website * * * mandates differ from one central bank to another. so, too, do the economic structures and business cycles of different central bank territories. these factors speak in favour of an autonomous monetary policy for each currency area. this monetary policy autonomy has proved its value for switzerland – also in the latest crisis. nevertheless, central banks do work with one another in a number of different ways. they exchange knowledge on a continual basis, thereby helping to improve the foundations upon which their own monetary policy decisions are made. central banks are also able to access foreign currencies by concluding swap agreements, allowing them to better counteract liquidity shortages on the international money market in times of crisis. finally, joint measures can have a strong psychological impact since they signal to financial markets and economic agents that the central banks are speaking with a single voice. autonomy and cooperation are not mutually exclusive. on the contrary. in a crisis, good cooperation supports and reinforces the effects of autonomous monetary policy measures. for a small, open economy like switzerland, in particular, the effectiveness of monetary policy measures can be largely dependent upon acceptance by the international environment. an important example for our country is the minimum exchange rate – an exceptional measure taken in an extreme situation. with this measure, the swiss national bank is countering distortions in the foreign exchange market which can be traced back to international events. the minimum exchange rate is accepted internationally because markets, international organisations and foreign central banks have understood the objective and motivation behind it, which they see as justified. bis central bankers ’ speeches