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Monetary policy SNB

Finance

Monetary policy and its challenges: an SNB perspective 

Published 2 February 2022 in Finance • 4 min read

SNB Governing Board Member Andréa Maechler discusses the cyclical and structural factors monetary policy makers must weigh up when deciding to tighten policy at an IMD event with MBA students and alumni. 

 

Gone are the days when central bankers could boast that monetary policy was boring. The sudden onset of the COVID-19 pandemic led to a plunge in global activity, prompting monetary policymakers around the world to respond with unprecedented action, slashing interest rates and massively expanding the balance sheets to prop up the global economy and stabilize financial markets. 

With most advanced economies having rebounded to their pre-pandemic levels, central bankers now face the tricky task of working out when and how to switch from crisis-fighting back to their traditional mandate of price stability. In the US, inflation hit a four-decade high, raising the pressure on US Federal Reserve boss Jay Powell to act faster and more decisively to rein in price rises. 

As they try to diagnose the future health of the global economy, central bankers must balance cyclical developments with long-term structural changes, said Andréa Maechler, who has served as a Governing Board member at the Swiss National Bank (SNB) since 2015. 

Speaking exclusively to an audience of IMD MBA students and alumni at an event moderated by Professor Arturo Bris, Maechler noted two big uncertainties complicating this task: the course of the pandemic and inflation.

Most central banks’ outlooks are based on the hypothesis that the large economies will not need to revert to strong containment measures
Andréa Maechler

“Most central banks’ outlooks are based on the hypothesis that the large economies will not need to revert to strong containment measures,” she said. While the Omicron variant has pushed new daily COVID-19 cases to record levels, there appears to be an uncoupling between disease rates and hospitalizations. A big question mark is whether the pandemic will become endemic or whether there will be a further need to implement containment measures, added Maechler. 

The second question facing central banks as they try to determine the timing and pace of any policy tightening is whether inflation is permanent or transitory.   

“The expectation is that disinflation dynamics should bring inflation rates back to around 2%, more or less. This is good news. But why is it so complex? If we do not believe it is temporary, central banks should really tighten monetary policy,” she said. “Central banks need to be careful; they should not act too fast as this could kill the recovery, but if they act too slowly, they will have to be more aggressive in what they do which could hit the financial markets and the economy down the road.” 

Central bankers are analyzing a range of indicators from supply bottlenecks to energy prices, she said. As stuck-at-home employees and consumers ordered more durable goods, demand for those goods has rocketed above pre-crisis levels, creating order backlogs that have lengthened delivery times and pushed up prices. The cost of shipping a 40-foot container now costs five times as much as it used to, noted Maechler. 

While these supply bottlenecks are likely to be temporary, a further consideration is a structural shift towards cleaner energy and the impact this will have on the dynamics of energy prices, she added. 

 

Diverging monetary policy 

The Fed and the European Central Bank (ECB) are taking their first steps towards normalization, albeit at a different pace. Financial markets now expect between four and five quarter point rate increases this year after Powell refused to rule out a string of aggressive rate hikes to bring inflation under control. The ECB is expected to follow, but much more gradually and over a longer period. 

Switzerland has been shielded from a big jump in inflation so far, partly because the strong Swiss franc makes imports cheaper and secondly because it hasn’t experienced the same wage pressure as in the US, where a strong increase in average hourly earnings have pushed up prices, said Maechler. 

Because inflation is much higher in the rest of the world, Swiss exporters have had more room to absorb a stronger franc, said Maechler. “If you correct for the different inflation rate, you see that the Swiss franc has not appreciated that much and this has given us some greater room to be able absorb the stronger Swiss franc,” she said. 

Nonetheless, Maechler said the strong franc was something the SNB continued to follow very closely and remained ready to intervene in foreign exchange markets. 

Concluding, Maechler said the SNB expects medium-term inflationary pressures to remain subdued in Switzerland. “It also means we need to maintain our current expansionary monetary policy, including the negative interest rate.” 

Expert

Andréa M. Maechler

Member of the SNB's Governing Board

Andréa M. Maechler is the first woman to occupy a position on the SNB's Governing Board. She is also Head of Department III (Money Market and Foreign Exchange, Asset Management, Banking Operations, Information Technology).

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