. the fact that it is possible for these risks to exist while monetary policy is responding appropriately to the macroeconomic situation perfectly illustrates the tinbergen principle – the number of instruments must equal the number of policy goals. 10 in the current environment, the interest rate cannot be the instrument of choice for addressing financial stability risks. the answer is to give more weight to what are known as macroprudential instruments implemented as a complement to, and along - side a monetary policy that remains firmly focused on price stability. these instruments directly target the risk - taking behaviour underlying financial stability risks. this is exactly the approach chosen in switzerland with the activation of the countercyclical capital buffer. by forcing banks to build up additional capital in the current phase of strong credit growth, the regulators aim at improving the capacity of the banking system to bear losses in the event that the identified risks materialise, while also limiting the further build - up of these risks. outlook we are now in a position to derive the implications of our analysis for the interest rate outlook. with respect to the secular trend toward lower interest rates, two observations are in order. first, i do not think the current situation bears the seeds for a return to the inflation rates of the seventies, despite the fears that are sometimes expressed. as argued, i thus do not see the reasons for a significant increase in the inflation premium. second, as to the other defining element of the secular trend, lower real rates, it is harder to make definitive statements. the ultimate drivers of this development and their respective roles have not been unambiguously clarified. for this reason, it is not possible to argue convincingly that the secular downward trend has run its course or that it is likely to revert. this is the main unknown in our equation. what is certain, however, is that the crisis - induced cyclical downturn will eventually be reversed. at some point, economies will return to more robust growth paths. interest rates and monetary policy will accompany this change in circumstances. thus, making sense of our assessment of the likely future path of interest rates hinges on our assessment of the economic outlook. let me be more specific here. for the global economy, the snb forecasts the continuation of a gradual, albeit subpar recovery. in the near term, indicators for the us, europe and china suggest that global growth should gradually gain in momentum and become more broad based ( chart 16 ). nevertheless, the recovery is likely to remain subdued. households

nominal long - term interest rates, it is useful to think of them as the sum of two elements, the real long - term interest rate and the inflation premium. economic theory tells us that the real interest rate is the price that matches the supply of savings with the demand for capital used for investment. supply and demand for funds, in turn, are determined by fundamental economic factors such as the time preference of households to consume today relative to consuming tomorrow, as well as the productivity of capital and demographic factors which determine future growth prospects. to arrive at market - quoted nominal interest rates, one must add to the real rate an inflation premium, which compensates the investor for the potential loss in the purchasing power of money over the term of the security. bis central bankers ’ speeches so, to shed light on the movement towards lower nominal interest rates since the 1980s, let us examine how these two components – the real interest rate and the inflation premium – have changed over that period. a secular downward shift a considerable part of the secular decline in nominal rates is the result of lower and more stable inflation rates in advanced economies, translating into reduced inflation expectations and a lower inflation premium ( chart 2 ). reduced volatility of inflation rates since the mid1980s – a development associated with the “ great moderation ” – has probably contributed to this. 1 this reduction in the inflation premium and in volatility can, at least partly, be attributed to the success of central banks ’ policies and their credible commitment to low and stable inflation, a commitment which has become the hallmark of modern central banking. realised real rates – calculated as observed nominal rates minus the realised inflation rates – have also declined, and have been substantially lower in the 2000s than in the 1980s ( chart 3 ). there are several potential explanations for this development. a first explanation is the “ global savings glut ” hypothesis, which states that the decline in real interest rates was the result of an increase in savings from emerging economies and oilproducing economies. it is argued that this increase was driven by, among other things, an accumulation of foreign exchange reserves, elevated oil prices and precautionary savings ( chart 4 ). 2 but the decline in real rates could also result from a decrease in growth prospects – itself caused, for instance, by a decline in the growth of productivity or population, or by demographic shifts, particularly a reduction in the working population relative to the nonworking population ( charts 5 and 6 ). 3 none