As a small open economy with a safe-haven currency, Switzerland is strongly influenced by global economic fluctuations. Because of the safe-haven nature of the Swiss franc, the impact of declines in global demand on the Swiss economy tends to be reinforced by an appreciating currency. As a result, global economic downturns have repeatedly been followed by significant decreases in inflation.
Given the strong influence of developments abroad on Swiss inflation, the SNB needs a monetary policy framework that allows for some flexibility in terms of accepted inflation rates. Accordingly, the SNB defines price stability as any inflation rate between 0% and 2%, and seeks to keep inflation within this range over the medium term. This has allowed the SNB to respond flexibly to shocks and continuously weigh up the costs and benefits of its monetary policy measures. While there have been episodes when inflation was temporarily outside the price stability range, it has always returned relatively quickly to values within that range.
The SNB's main tool is the SNB policy rate, which determines the monetary policy stance and is thus the focus of its communication. As an additional monetary policy measure, the SNB has also used foreign exchange interventions, both for countering the threat of deflation and for fighting inflation. A major side effect of the foreign currency purchases required in the years after the global financial crisis has been the expansion of the SNB's balance sheet, which has led to major fluctuations in its annual results. In light of the balance sheet risks, the SNB's equity capital is currently considerably too low. Building up the SNB's capital must thus take precedence over profit distributions.
The Swiss economy has performed well by international comparison over the past couple of decades. The SNB has contributed to this performance by maintaining price stability despite significant deflationary and inflationary risks. Going forward, the SNB will continue to contribute to favourable economic conditions in Switzerland by ensuring price stability.