Central banks worldwide will need to face the fact that pressure on prices will remain high for the coming years and that inflation dynamics will continue to be clouded by uncertainty, Switzerland’s central bank chief has told his colleagues in Jackson Hole. The Swiss central bank also prides itself in working with a narrow mandate that is not influenced by political considerations.
“Structural factors such as the transition to a greener economy, rising sovereign debt worldwide, the demographic transition and ultimately also the fact that globalisation appears to have peaked – at least temporarily – could lead to persistently higher inflationary pressure in the coming years,” Thomas Jordan, chair of the governing board of the Swiss National Bank, said in his speech on Saturday.
“In particular, a decline in global economic integration could increase companies’ pricesetting power, meaning that they would be able to push through price increases more easily,” he said. “However, from the current perspective, it is difficult to assess precisely how these structural factors will develop, and how they will influence inflation dynamics.”
Narrow mandate of ‘fundamental importance’
Under these uncertain conditions, maintaining a clear and strong focus is essential, he said, without alluding directly to other central banks such as the ECB that have taken on additional responsibilities outside monetary policy in recent years.
“The SNB’s mandate is clearly focused and should remain so, regardless of important societal problems such as climate change and the financing of pension provision,” Jordan said. “A narrow mandate allows a central bank to concentrate on the essential task of ensuring price stability, but is also of fundamental importance in safeguarding its independence. Independence seeks to achieve and requires distance from politics. This distance is therefore not something to be given up lightly.”
Strong franc keeps inflation down
With inflation at 3.4 percent, Switzerland is not experiencing the relatively high levels for price increases as in the US and the Eurozone although even at that level the inflation rate is “significantly above the range we equate with price stability” and is the highest Switzerland has seen since the 1990s, said Jordan. Swiss inflation has been lower than elsewhere in recent years because of a strong Swiss franc and a favourable energy mix, with less dependence on natural gas imports than other European countries.
More recently, Switzerland has noticed that inflation is increasingly spreading to goods and services that are not directly affected by the pandemic or the war in Ukraine. “In fact, it appears that in the current environment, higher prices are being passed on more quickly – and are also being more readily accepted – than was the case until just recently. In conjunction with this, longerterm inflation expectations have also been moving upwards slightly over the past quarters,” Jordan said.
As part of its fight against inflation, the SNB in December flagged that it would let the Swiss Franc appreciate further in order to reduce inflationary pressures from abroad. The Franc has gained about 4 percent since the end of 2021. In June, the SNB also announced its first rate hike in 15 years, raising its benchmark rate to -0.25 percent.
‘Fine-tuning inflation is unrealistic’
“Waiting could have necessitated a more abrupt and stronger rate increase at a later date, with the risk of a more severe economic downturn and threats to financial stability,” said Jordan. “The SNB’s experience in the late 1980s and early 1990s, the most recent phase of higher inflation in Switzerland, shows that it can become necessary to pursue a markedly restrictive monetary policy with serious consequences for the real economy once inflation exceeds a certain level.”
Looking ahead, the Swiss central bank needs to consider a range of factors that are still uncertain. Among these, Jordan mentioned the consequences of the war in Ukraine. “Given the difficulty in identifying an increase in sustained inflationary pressure in the current environment, there is the risk of underestimating the persistence of inflation.
“Given the openness of our economy, fine-tuning inflation is unrealistic,” Jordan said.