Swiss monetary policy principles Swiss monetary policy principles - PowerPoint PPT Presentation

1 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Swiss monetary policy principles Swiss monetary policy principles and reaction to the crisis University of Fribourg April 3, 2009 Florence Miguet, Economic Analysis

2 2 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Structure of the presentation • MANDATE OF THE SWISS NATIONAL BANK • PART I: • PART I: SNB MONETARY POLICY STRATEGY • PART II: REACTION TO THE CURRENT CRISIS • MORE QUESTIONS?

3 3 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Mandate of the Swiss National Bank Federal Constitution (art. 99): • “As an independent central bank, the Swiss National Bank shall pursue a monetary policy serving the interests of the country as a whole” Federal Act on the Swiss National Bank (art. 5, al. 1): Federal Act on the Swiss National Bank (art 5 al 1): • • “The SNB shall ensure price stability . In so doing, it shall take due account of the development of the economy” Federal Act on the Swiss National Bank (art. 5, al. 2, lit. e): • “It shall contribute to the stability of the financial system ”

4 4 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Mandate of the Swiss National Bank Art. 6 of the Act clarifies also what is meant by • independence : “In fulfilling its monetary tasks, the National Bank and the members of the Bank’s bodies shall not be permitted to seek or accept instructions either from the Federal Council or from the Federal instructions either from the Federal Council or from the Federal Assembly or any other body” Art. 7 al. 2 of the Act specifies SNB’s duty for accountability • which is the counterpart of independence: “The National Bank shall render account of the fulfilment of its tasks pursuant to article 5 to the Federal Assembly annually in the form of a pursuant to article 5 to the Federal Assembly annually in the form of a report. It shall regularly elaborate on the economic situation as well as its monetary policy to the competent committees of the Federal A Assembly” bl ”

5 5 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Part I SNB MONETARY POLICY STRATEGY

6 6 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Monetary policy strategy Main goal: Maintaining price stability in the medium-term 1975-1999: Monetary targeting y g g • 2000 onwards: New monetary policy strategy • � 4 elements: 4 elements: An explicit definition of price stability 1) A conditional inflation forecast as main guide for policy decisions 2) A range for a short-term interest rate as operative target 3) Repo operations as main instrument 4)

7 7 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 1) Price stability Inflation rate of less than 2% y/y and not negative • Set in terms of headline CPI , not of CORE inflation index , • The definition of price stability takes into account • measurement, substitution and quality adjustment bias The definition of price stability delivers the nominal anchor • for the medium-term orientation of monetary policy o It is important for stabilizing inflation expectations o It is the benchmark for the accountability of the SNB

8 8 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 2) Conditional inflation forecast Forward-looking monetary policy: a conditional inflation • forecast is used as the main indicator for guiding monetary policy decisions Inflation forecast is conditional on fixed interest rates and • on assumptions regarding the evolution of the world economy and of oil prices In principle, monetary policy needs to be adjusted when there I i i l t li d t b dj t d h th • is evidence of a sustained deviation of the projected inflation from the range compatible with price stability inflation from the range compatible with price stability Monetary policy does not react mechanically to the inflation • forecast, the economic situation plays an important role o ecast, t e eco o c s tuat o plays a po ta t ole

9 9 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 How is the inflation forecast derived? The SNB inflation forecast is put together as a broadly based • consensus forecast o Forecasts of different models and indicators are considered The weighting of different model forecasts and various • indicators leads to a consensus forecast o The weights are not fixed; the weighting method depends on critical analysis of models and indicators and on the specific economic analysis of models and indicators and on the specific economic situation Quarterly publication of inflation forecast over a 3-year • horizon o Since monetary policy takes some time to influence inflation, the forecast horizon used corresponds to the average lag of the forecast horizon used corresponds to the average lag of the transmission mechanism

10 10 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Models NON-STRUCTURAL 1. ARIMA and VAR - Autoregressive Integrated Moving Average, Vector Autoregression SEMI-STRUCTURAL 2. SVAR - Structural Vector Autoregression St t l V t A t i 2 SVAR 3. SVEC – Structural Vector Error Correction STRUCTURAL 4a. Small 4. SEM - Simultaneous Equation Models 4. SEM Simultaneous Equation Models 4b. Medium 5 . DSGE - Dynamic Stochastic General Equilibrium y q

11 11 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Timing Regular quarterly basis • o Dates are known to the public (March, June, September and December) Defining scenarios Computing Reports Meeting of for the consensus and policy Board international inflation-forecast suggestion to with policy business cycle : from model Board decision forecasts and Base scenario and ase sce a o a d indicator i di t risk scenarios information (Board approval ) T-4 weeks T-3 weeks T-1 week T Extraordinary meetings in case of special circumstances... •

12 12 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Current forecast Point forecast: No fan chart ! •

13 13 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Interpretation of the forecast Although the forecast horizon extends over the subsequent 3 • years, the individual forecast itself is valid for 3 months at most The published forecast is conditional on the level of interest • rate as it is set after the policy decision o If inflation at the end of the forecast horizon is within the range of price stability and displays no sustained trend , the published price stability and displays no sustained trend the published forecast offers no hint as to the likely changes in the interest rate over the following 3 months o However, a published forecast that shows a sustained trend or a rate H bli h d f h h i d d that departs from price stability at the end of the forecast horizon signals future interest rate changes, although the timing will remain unspecified

14 14 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 SNB strategy vs. inflation targeting The definition of price stability: • o Should be valid for an extended period of time o Should not be changed for political reasons o The SNB is happy with any non-negative value under 2% There is no defined time horizon for reaching price stability • o The SNB is free to choose the time horizon to restore price stability after an inflationary shock after an inflationary shock o The time horizon will depend on circumstances and the stance of the economy The inflation forecast is not used as an intermediate target • but rather as the main indicator o No commitment to react systematically to deviations with the i i ll d i i i h h forecast

15 15 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 3) Target range for the 3M-Libor A target range for the 3M-Libor (London Interbank Offered • rate) represents the operational target ( ≠ BoE, Fed, ECB) The 3M-Libor is a significant short-term interest rate for • Switzerland (e.g. mortgages rates) o Computed in London by the British Banker’s Association as an average of data provided by 12 banks (3 highest + lowest rates excluded) If not limited by technical factors the target range is 100 If not limited by technical factors, the target range is 100 • • basis points wide The region within the range that is being aimed at (centre The region within the range that is being aimed at (centre, • • upper, or lower part) is announced together with the target range itself g

16 16 University of Fribourg, April 3, 2009 University of Fribourg, April 3, 2009 Why a target range on a 3-month rate? For a small open economy like Switzerland, the target range • of the 3M-Libor allows to absorb small exchange rate shocks without intervention of the SNB which could be considered as a change in the course of monetary policy A 3-month rate cannot be fixed precisely by the central bank • o Market expectations and risk premium exert also an influence o A target range allows to ensure a certain flexibility A target range allows to ensure a certain flexibility