On 23 February, Thomas J. Jordan, Chairman of the Governing Board of the Swiss National Bank, gave a SAFE Policy Center Lecture. Jordan explained which monetary policy measures have been taken by central banks in the euro area’s neighboring countries, in particular Switzerland, since the onset of the financial crisis in 2008. The lecture was moderated by Hans-Helmut Kotz from the SAFE Policy Center.
In his lecture, Jordan analyzed monetary policy in four small open economies with strong trade links to the euro area: Switzerland, the Czech Republic, Sweden and Denmark. With the exception of Denmark, these countries pursue an independent monetary policy. Because small open economies are affected by global conditions, their central banks have to consider changes in euro area monetary policy when implementing monetary policy measures.
Since the onset of the financial crisis in 2008, there have been three phases of monetary policy in Europe, the Swiss central banker outlined. The first period between 2008 and 2011, was characterized by a global slump in demand which resulted in a recession in the euro area. During this period, European central banks primarily used conventional monetary policy measures, such as interest rate cuts and the provision of liquidity.
In the second phase, between 2011 and 2014, fears about the future of the euro area were growing, which led to concerns about potential consequences for neighboring countries in the event of a collapse. Also, global economic recovery had lost a great deal of momentum and the high levels of government debts in some European countries became a source of concern, Jordan explained. During this period, central banks implemented the first unconventional monetary policy measures. Uncertainties on financial markets caused investors to take refuge in the Swiss franc as a “safe haven”-currency which resulted in an appreciation pressure on the franc. The Swiss franc was heavily overvalued, Jordan said, which led to a severe deterioration in the economic and inflation outlook for Switzerland. To counteract this development the Swiss National Bank, at first, increased liquidity and, finally, introduced a minimum exchange rate of CHF 1.20 per euro as a temporary, exceptional measure. The other euro area’s neighboring countries also implemented unconventional monetary policy measures during this period, such as negative interest rates, foreign exchange market interventions and quantitative easing programs.
In the third phase, since mid-2014, the ECB has continued to ease monetary policy. According to Jordan, this was partly beneficial for the neighboring countries because the ECB’s monetary policy measures supported economic recovery in the euro area, which, due to real economic linkages, would also benefit neighboring states. On the other hand, the ECB’s quantitative easing also led to an increased appreciation pressure on the euro area’s neighbor currencies. As a result, the pressure on the minimum exchange rate of the Swiss franc increased and, finally, at the beginning of 2015, it had to be abandoned. The Swiss franc appreciated abruptly against the euro.
Jordan welcomed that unconventional monetary policy measures, which are widespread in Europe today, have given central banks more room for maneuver. These instruments must be continually assessed as to their cost/benefit ratio, he said. If an instrument, after a change in prevailing conditions, no longer has the desired effect, monetary policy should be adjusted. In this regard, not only the short-term costs and benefits have to be taken into account, but also the long-term consequences.