1 Swiss mnetary plicy principles and reactin t the crisis University f Friburg April 3, 2009 Flrence Miguet, Ecnmic Analysis
2 2 Structure f the presentatin MANDATE OF THE SWISS NATIONAL BANK PART I: SNB MONETARY POLICY STRATEGY PART II: REACTION TO THE CURRENT CRISIS MORE QUESTIONS?
3 3 Mandate f the Swiss Natinal Bank Federal Cnstitutin (art. 99): As an independent central bank, the Swiss Natinal Bank shall pursue a mnetary plicy serving the interests f the cuntry as a whle Federal Act n the Swiss Natinal Bank (art. 5, al. 1): The SNB shall ensure price stability. In s ding, it shall take due accunt f the develpment f the ecnmy Federal Act n the Swiss Natinal Bank (art. 5, al. 2, lit. e): It shall cntribute t the stability f the financial system
4 4 Mandate f the Swiss Natinal Bank Art. 6 f the Act clarifies als what is meant by independence: In fulfilling its mnetary tasks, the Natinal Bank and the members f the Bank s bdies shall nt be permitted t seek r accept instructins either frm the Federal Cuncil r frm the Federal Assembly r any ther bdy Art. 7 al. 2 f the Act specifies SNB s duty fr accuntability which is the cunterpart f independence: The Natinal Bank shall render accunt f the fulfilment f its tasks pursuant t article 5 t the Federal Assembly annually in the frm f a reprt. It shall regularly elabrate n the ecnmic situatin as well as its mnetary plicy t the cmpetent cmmittees f the Federal Assembly
5 5 Part I SNB MONETARY POLICY STRATEGY
6 6 Mnetary plicy strategy Main gal: Maintaining price stability in the medium-term 1975-1999: Mnetary targeting g 2000 nwards: New mnetary plicy strategy 4 elements: 1) An explicit definitin f price stability 2) A cnditinal inflatin frecast as main guide fr plicy decisins 3) A range fr a shrt-term interest rate as perative target 4) Rep peratins as main instrument
7 7 1) Price stability Inflatin rate f less than 2% y/y and nt negative Set in terms f headline CPI,, nt f CORE inflatin index The definitin f price stability takes int accunt measurement, substitutin and quality adjustment bias The definitin f price stability delivers the nminal anchr fr the medium-term rientatin f mnetary plicy It is imprtant fr stabilizing inflatin expectatins It is the benchmark fr the accuntability f the SNB
8 8 2) Cnditinal inflatin frecast Frward-lking mnetary plicy: a cnditinal inflatin frecast is used as the main indicatr fr guiding mnetary plicy decisins Inflatin frecast is cnditinal n fixed interest rates and n assumptins regarding the evlutin f the wrld ecnmy and f il prices In principle, i mnetary plicy needs t be adjusted d when there is evidence f a sustained deviatin f the prjected inflatin frm the range cmpatible with price stability Mnetary plicy des nt react mechanically t the inflatin frecast, ecast,the ecnmic c situatin plays an imprtant t rle
9 9 Hw is the inflatin frecast derived? The SNB inflatin frecast is put tgether as a bradly based cnsensus frecast Frecasts f different mdels and indicatrs are cnsidered The weighting f different mdel frecasts and varius indicatrs leads t a cnsensus frecast The weights are nt fixed; the weighting methd depends n critical analysis f mdels and indicatrs and n the specific ecnmic situatin Quarterly publicatin f inflatin frecast ver a 3-year hrizn Since mnetary plicy takes sme time t influence inflatin, the frecast hrizn used crrespnds t the average lag f the transmissin mechanism
10 10 Mdels NON-STRUCTURAL 1. ARIMA and VAR - Autregressive Integrated Mving Average, Vectr Autregressin SEMI-STRUCTURAL 2. SVAR - Structural t Vectr Autregressin 3. SVEC Structural Vectr Errr Crrectin STRUCTURAL 4. SEM - Simultaneus Equatin Mdels 4a. Small 4b. Medium 5. DSGE - Dynamic Stchastic General Equilibrium
11 11 Timing Regular quarterly basis Dates are knwn t the public (March, June, September and December) Defining scenaris fr the internatinal business cycle: Base scenari and risk scenaris (Bard apprval) Cmputing cnsensus inflatin-frecast frm mdel frecasts and indicatr infrmatin Reprts and plicy suggestin t Bard Meeting f Bard with plicy decisin T-4 weeks T-3 weeks T-1 week T Extrardinary meetings in case f special circumstances...
12 12 Pint frecast: N fan chart! Current frecast
13 13 Interpretatin f the frecast Althugh the frecast hrizn extends ver the subsequent 3 years, the individual frecast itself is valid fr 3 mnths at mst The published frecast is cnditinal n the level f interest rate as it is set after the plicy decisin If inflatin at the end f the frecast hrizn is within the range f price stability and displays n sustained trend, the published frecast ffers n hint as t the likely changes in the interest rate ver the fllwing 3 mnths Hwever, a published frecast that shws a sustained trend r arate that departs frm price stability at the end f the frecast hrizn signals future interest rate changes, althugh the timing will remain unspecified
14 14 SNB strategy vs. inflatin targeting The definitin f price stability: Shuld be valid fr an extended perid f time Shuld nt be changed fr plitical reasns The SNB is happy with any nn-negative value under 2% There is n defined time hrizn fr reaching price stability The SNB is free t chse the time hrizn t restre price stability after an inflatinary shck The time hrizn will depend n circumstances and the stance f the ecnmy The inflatin frecast is nt used as an intermediate target but rather as the main indicatr N cmmitment t react systematically t deviatins i with ih the frecast
15 15 3) Target range fr the 3M-Libr A target range fr the 3M-Libr (Lndn Interbank Offered rate) represents the peratinal target ( BE, Fed, ECB) The 3M-Libr is a significant shrt-term interest rate fr Switzerland (e.g. mrtgages rates) Cmputed in Lndn by the British Banker s Assciatin as an average f data prvided by 12 banks (3 highest + lwest rates excluded) If nt limited by technical factrs, the target range is 100 basis pints wide The regin within the range that is being aimed at (centre, upper, r lwer part) is annunced tgether with the target range itself
16 16 Why a target range n a 3-mnth rate? Fr a small pen ecnmy like Switzerland, the target range f the 3M-Libr allws t absrb small exchange rate shcks withut interventin f the SNB which culd be cnsidered as a change in the curse f mnetary plicy A 3-mnth rate cannt be fixed precisely by the central bank Market expectatins and risk premium exert als an influence A target range allws t ensure a certain flexibility
17 17 Mnetary plicy decisins since 2000 January 2000: 1.75% 03.02.2000 +50bp 2.25% 23.03.2000 +75bp 3.00% 15.06.2000 +50bp 3.50% 22.03.2001 2001-25bp 3.25% 17.09.2001-50bp 2.75% 24.09.2001-50bp 2.25% 07.12.2001-50bp 1.75% 02.05.2002-50bp 1.25% 26.07.2002-50bp 0.75% 06.03.2003-50bp 0.25% 17.06.2004 +25bp 0.50% 16.09.2004 +25bp 0.75% 15.12.2005 +25bp 1.00% 16.03.2006 +25bp 1.25% 15.06.2006 +25bp 1.50% 14.09.2006 +25bp 1.75% 14.12.2006 +25bp 2.00% 15.03.2007 +25bp 2.25% 25% 14.06.2007 +25bp 2.50% 13.09.2007 +25bp 2.75% 08.10.2008-25bp 2.50% 06.11.2008-50bp 2.00% 20.11.2008-100bp 1.00% 11.12.2008-50bp 0.50% 12.03.2008-25bp 0.25%
18 18 4) Rep peratins Rep (Repurchase Agreement) peratins are the key instrument f the SNB t manage the mney supply Daily auctins allw the SNB t steer the 3M-Libr (maturity: vernight t 3-weeks, exceptinally 3-, 6- r 12- mnths) The SNB sets the rep rate and the rate f allcatin Banks have t prvide a cllateral (security) Other instruments: Intraday liquidity is supplied free f charge Liquidity-shrtage facility (50 bp abve the vernight rate) Freign exchange swaps
19 19 4) Rep peratins Tday SNB CHF Cllateral Cmmercial bank CHF + rep rate Cmmercial Term SNB Cllateral + dividend bank
20 20 Timing f the transmissin mechanism Instrument (Rep rate, liquidity) Financial markets (Libr, Asset prices, Exchange rates) Immediate Aggregate demand (Cnsumptin, Investment, Exprts- Imprts Output gap) 4-8 quarters Prices and inflatin 6-12 quarters
21 21 Cmmunicatin and transparency Cmmunicatin and transparency are imprtant aspects f the strategy The press release Mnetary plicy assessment is published after the bard meetings and explains briefly the plicy decisin The Quarterly Bulletin prvides a detailed review f the principal i indicatrs which h funded d the last plicy decisin i Articles n the mnetary plicy strategy and n the frecasting mdels are als published in the Quarterly Bulletin Members f the bard and senir staff explain Swiss mnetary plicy in speeches
22 22 Recent perfrmance Oil price effects
23 23 Recent perfrmance N prblem f credibility at the time the new mnetary plicy strategy was intrduced (in 2000) Prices were stable in Switzerland between 1994 and 2007, i.e. during 13 years Average annual grwth rate f CPI between 1994 and 2007: 0.9% Seldm higher than 2% On a mnthly basis there were sme exceptins in 1995 (intrductin f the VAT) Inflatin was higher than 2% between December 2007 and Nvember 2008 due t temprary il price effects
24 24 The rle f the exchange rate The SNB has n exchange rate target Hwever, the exchange ratecannt be ignred in a small pen ecnmy like Switzerland It is relevant fr inflatin frecast A change in the exchange rate affects inflatin thrugh different channels in the mdels: Directly, thrugh traded gd prices Indirectly, thrugh its impact n activity Indirectly, thrugh expectatins
25 25 Part II REACTION TO THE CURRENT CRISIS
26 26... bubble in the US husing market Peak Decline
27 27... bubble in the US husing market Prperty price bm in the US... Causes: excessive glbal liquidity lending practices in US prperty sectr (excessive risk-taking + securitisatin) excessive level f husehld debt increasing US interest rates slvability prblems fr subprime brrwers
28 28 Effect n the financial markets 2 types f liquidity prblems: Financial liquidity: investrs cnfrnted with difficulties t refinance their psitins (raising capital) Market liquidity: investrs cnfrnted with difficulties t sell their assets rapidly and at a gd price Debtrs: cntractin f balance sheets and de-leveraging Rapid decrease in equity capital due t leverage effects raise capital Simultaneity effect Runs n debts and equity capital Creditrs: accumulatin f precautinary liquidities Uncertainties cncerning their wn financial situatin N mre cnfidence fd in the interbank market (nt cllateralized) l Illiquid assets principle f first arrived first served
29 29 Effect n the financial markets Financial institutins start t write-ff bad assets (July- August 2007): interbank lending slws dwn significantly jump in Libr rates / risk premium Subprime crisis Lh Lehman Brthers cllapse
30 30 Macrecnmic impacts Deteriratin in financial cnditins Increased risk premium Credit-crunch Hampers investment and durable gds cnsumptin (e.g. cars) Decrease in wealth Drp in prperty prices Drp in asset prices Hampers investment and cnsumptin Cnfidence lss f firms and husehlds Value f waiting increases Hampers investment and cnsumptin and decreases hiring
31 31 Macrecnmic impacts
32 32 Macrecnmic impacts
33 33 SNB respnses t the crisis 1) Interventins n the mney market a) In USD b) In CHF 2) Mnetary plicy stance
34 34 Mney market: USD Liquidity prblems n the USD market Swap agreement with the Fed Crdinated with ther central banks USD Fed ECB Neutral fr the CHF USD CHF Eur Lan in USD Swap agreement Rep auctin SNB SNB Cllateral Cmmercial banks
35 35 Mney market: USD USD bn 35 SNB's utstanding vlume f USD-Auctins 30 25 20 Lehman Brthers cllapse ON 1W 15 10 28d 5 84d 0 Dec 07 Mar 08 May 08 Aug 08 Oct 08 Dec 08 Mar 09
36 36 Mney market: CHF Decisin taken independently f the financial crisis Redefinitin f the criteria fr cllateral eligible fr SNB reps list f securities cnsiderably expanded Instruments used t ease liquidity strains Intrductin f lng-term CHF rep transactins (3-week t 12-mnth) Reductin f the premium fr liquidity-shrtage facility Temprary enlargement f the equity capital admitted as cvered bnd Financing f the transfer f illiquid assets f the UBS t a special purpse vehicle fr rderly liquidatin (based n SNB's statutry mandate t cntribute t the stability f the financiali system) Issue f SNB Bills see next slide Swap EUR/CHF see next slide
37 37 Mney market: CHF SNB bills SNB SNB bill + interest CHF Increases liquidity f the Cmmercial CHF n the banks mney market Issue f SNB bills SNB Lan in CHF SNB bill Rep auctin SNB Cmmercial banks
38 38 Mney market: CHF Depreciatin f eastern Eurpean currencies A large amunt f mrtgages and credits issued in the Eastern Eurpean cuntries in CHF High demand d f CHF pressure n CHF interest rates Temprary EUR/CHF swap with the ECB, NBP, MNB Prvide CHF t banks with n direct access t the SNB
39 39 Mney market: CHF Abschöpfungsgeschäfte SNB Bills FX Swap 1W 2W 3W 1M 3M NST 6M 12M CHF bn 120 Ausstand geldplitische Operatinen 100 80 60 40 20 0-20 -40 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nv 08 Dec 08 Jan 09
40 40 SNB mnetary plicy stance 13.09.2007: First turbulences in the financial markets, 3- Mnth CHF Libr increased t 2.9% while target was 2.5% SNB decisin: i +25 bp t 2.75% 13.12.2007: Increasing inflatin pressures but deterirating ecnmic utlk and increasing uncertainties SNB decisin: n change 13.03./19.06./18.09.2008: idem
41 41 SNB mnetary plicy stance 08.10.2008: Jint statement by central banks (Fed, ECB, Bank f Canada, Riksbank, BE, SNB). Intensificatin f the financial i crisis i and dwnside risks t grwth while inflatinary pressures started t mderate. 3-Mnth CHF Libr increased t 3.0% while target was 2.75% SNB decisin: -25bp t 2.50%
42 42 SNB mnetary plicy stance 06.11.2008: Ecnmic envirnment deterirated while the il price declined and the CHF appreciated SNB decisin: i -50bp t 2.00% 20.11.2008: Further decline in prices f raw materials and il SNB decisin: -100bp t 1.00%
43 43 SNB mnetary plicy stance 11.12.2008: Ecnmic envirnment further deterirated SNB decisin: -50bp t 0.50% 12.03.2009: Ecnmic situatin deterirated sharply and risks f negative inflatin ver the next three years SNB decisin: -25bp t 0.25% Buying CHF bnds issued by private sectr brrwers Purchasing freign currency n the freign exchange markets
44 44 Cnclusins In January 2000, the SNB adpted a new mnetary plicy strategy which aimed at maintaining price stability by fixing a target range fr the 3M-Libr n the basis f a general analysis f the ecnmic situatin cntained in a published inflatin frecast This strategy helps the SNB t have the necessary rigr t maintain its gal f price stability with the necessary flexibility t deal with external shcks Reactin t the financial crisis... T be cntinued...
45 45 Mre questins? WWW.SNB.CH