The euro and Swiss monetary policy
Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank
Europa Forum, Lucerne, 02.05.2016
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The EU countries, and especially those belonging to the euro area, are by far Switzerland's most important foreign trade partners. Consequently, the monetary policy of the European Central Bank (ECB) is particularly relevant for our country. In recent years, the ECB's expansionary monetary policy has encouraged the economic recovery in the euro area, which in turn has bolstered demand for Swiss products. However, the weakening of the euro has put Swiss producers in a bind versus their European competitors and presented problems for Switzerland's monetary policymakers.
Despite our country's close economic ties to the euro area, introducing the euro was never seriously contemplated in Switzerland. When the monetary system established in Bretton Woods collapsed, Switzerland decided to adopt a system of floating exchange rates - a decision which has, over the long term, proved its worth. At times, however, flexible exchange rates can be subject to considerable fluctuations. Over the last 40 years, the Swiss National Bank (SNB) has therefore twice introduced a temporary exchange rate floor in order to cap substantial Swiss franc appreciation: first in October 1978 against the German mark, and latterly in September 2011 against the euro. A minimum exchange rate is not a long-term instrument. It can, however, give guidance to the markets in a period of extreme uncertainty - when one's own currency is significantly overvalued against all other currencies - and thus contribute to ensuring adequate monetary conditions.
The SNB discontinued the minimum exchange rate against the euro in January 2015. At the same time, it moved interest rates on sight deposits at the SNB deeper into negative territory, and reaffirmed its willingness to intervene in the foreign exchange market as necessary. The SNB's monetary policy thus helps to stabilise price developments and support economic activity. The SNB will continue to make the most of the latitude afforded by monetary sovereignty to respond pragmatically to the challenges ahead. However, monetary policy cannot remedy all economic ills, especially those of a structural nature. It is therefore important for companies to continue operating with a high degree of flexibility and for policymakers to ensure favourable economic conditions.