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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Switzerland published on 15 January 2010.
Monetary policy needs to react to the cycle while avoiding deflation and inflation risks
The recession has given rise to some fears of a deflationary spiral in Switzerland. The risks of this are small, if the economy recovers as expected. When interest rates were up against the zero lower bound, interventions in the foreign exchange market to prevent an appreciation of the Swiss Franc became an important element of quantitative easing and of a deflation-avoiding monetary policy and proved to be successful. The SNB has correctly emphasised its intention not to engage in competitive devaluation. Furthermore, the usefulness of the exchange rate instrument is limited in the context of a global recession that makes deflationary pressure persistent. In the current situation, the main challenge facing the SNB concerns the exit strategy. As the economy recovers the SNB should withdraw excess liquidity in order not to jeopardize price stability over the medium term. At the same time, it must not act too soon, for otherwise the recovery could be put at risk. The exit strategy must be clearly communicated.
Money aggregates in Switzerland
As a percentage of GDP
Source: SNB, Monthly Statistical Bulletin; OECD, Economic Outlook No. 86 database.
One of the debates arising from the global financial crisis is whether monetary policy needs to lean more strongly against the credit cycle in upswing periods in order to avoid the build-up of financial market imbalances. Philips curves flattened prior to the financial crisis, perhaps reflecting the increased credibility of monetary policy oriented to price stability. As a result, the impact of low policy rates in periods of credit expansion may not make itself manifest in inflation but through other imbalances, such as asset bubbles. Low interest rates in Switzerland did not generate strong growth of lending domestically. However, carry trade in Swiss Franc may have reflected growing imbalances. The SNB elaborates its inflation forecast with a portfolio of econometric models and indicators, which incorporates credit and money supply growth. The SNB should further examine whether its current framework already takes sufficient account of the potential costs of asset imbalances.
How to obtain this publication
The complete edition of the Economic Survey of Switzerland is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Switzerland Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat’s draft report was prepared by Andrés Fuentes, Charles Pigott and Eduardo Camero under the supervision of Pierre Beynet. Statistical assistance was provided by Patrizio Sicari. The survey also benefited from external consultancy work.