We are Guided by Our Mandate

Grzegorz Jeż, “Obserwator Finansowy”: We may say that the Swiss National Bank seems very hawkish about the rate of inflation. Why is it so important for you to bring inflation down?

Martin Schlegel, Vice-Chairman of the Governing Board of the Swiss National Bank: So, the Swiss National Bank is guided by its mandate. The mandate is very clearly stated in the law, which is price stability. So, the mandate is what we are looking at. And we have a definition of price stability, which is from 0 to 2 per cent. It’s actually a range. And now we inflation at 3.3 per cent, which is clearly above our inflation range. And this is something that we cannot accept as a central bank. We do not think in categories, like hawks or doves. We just follow our mandate. So what did we do to bring inflation back into our target range? So, in late 2021 we actually communicated that we will tolerate a certain appreciation of the Swiss franc and, because much of the inflation is imported inflation, this obviously dampens inflation. Then, the second thing we did was the interest rate hike in June, the first one after more than a decade, and the second one in September and the third one in December. So now, we are at the SNB policy rate of 1 per cent. What we also said is that, regarding the exchange rate, we are still willing to be active in the FX market. If the Swiss franc depreciates, we are ready to sell foreign exchange. If the Swiss franc strongly appreciates, then we are also ready to buy FX again.

What is driving inflation up today?

So, going back a little bit. In early 2020, Swiss inflation was negative. So we had deflation. And as in other countries we had the same drivers, we had the high energy prices. We also had the goods that were affected by supply bottlenecks that drove up inflation. We had an inflation peak of 3.5 per cent last August, but since then it has retreated a little bit.

My question concerns the idea of inflation itself. Aren’t we today a little bit obsessed with the inflation process, without regard for any other economic and social factors?

So, central banks should be guided by their mandate and the mandate is very clear. It’s price stability in our case and taking due regard of the economic developments. So, for central banks, like science says, in the long run central banks can only affect prices, inflation, and not the real economy, which also means that central banks should focus on price stability. If they achieve price stability, they can also look at, for example, economic developments.

But today central banks in Europe, in the world, are in the limelight during high inflation. But the question is whether they can do a lot about it because there is an energy crisis, there is an ongoing war between Russia and Ukraine. And the question is whether central banks’ activity may be effective in this way, if we have external shocks.

I see your point. In the first phase of this, rising inflation was clearly a supply-shock, like the energy prices increasing, and also the supply-bottlenecks that we faced after the pandemic. And this also led many central banks to the conclusion that it must be something temporary. But then what we saw was like a broadening of the whole price pressure to other goods and services that were not affected by bottlenecks, for example. And then, in this situation the monetary policy is the right tool, then we have to increase interest rates, we have to tighten monetary policy and monetary conditions so that in the end we have a slowdown of the economy and also a cooldown of inflation.

The Swiss currency is very important to the whole world. Do you sometimes feel the burden of your decisions? Because the impact of your decisions is, we may say, worldwide. For example, for mortgage credits in other countries. Do you take it into consideration sometimes or does it matter?

Of course it matters for us. But in the end, we have our mandate, we have price stability in Switzerland. But, of course, these developments that you just spoke about, like mortgages in Swiss francs in other countries, these also have an effect on Switzerland. If you look at the global financial crisis: we have a strong appreciation of the Swiss franc and one of the reasons for this appreciation of the Swiss franc was exactly the unwinding of such mortgages in countries like Poland or Croatia and so on because people had to buy back the Swiss franc or banks had to buy back the Swiss franc in order to cover their FX exposure.

My last question concerns a buzzword: polycrisis. This year in Davos it was a ubiquitous buzzword. Do you think that today we live in special times, if we take into account that we have several ongoing crises?

Of course. I mean the crises that we have right now they are very exceptional, like the war in Ukraine, but also the pandemic was very exceptional. But even before, I would say, we were living in an exceptional world after the global financial crisis, with ultraloose monetary policy. I would say almost the last 15 years were exceptional. And I also think that it’s probable that times will be exceptional in the future and also a lot of uncertainty for central banks.

The interview was held on the 21st of February 2023