The Swiss National Bank, in agreement with the Federal Government, plans to tighten monetary policy somewhat in the year 2000. Already in autumn it permitted money market rates to rise after having pursued a generous monetary policy for an extended period. The National Bank continues to support the economic upswing with its policy, without jeopardising price stability in the long term.
At the start of 2000 the National Bank adapted its monetary concept in various respects. It no longer fixes growth targets for the money supply. Monetary policy decisions will, in future, be based mainly on an inflation forecast, which will take all relevant indicators into account. The money stock M3, continues to play an important role as a monetary indicator. As in the past, the National Bank will primarily orient its monetary policy to the preservation of price stability. Price stability is considered to have been achieved with an inflation rate, measured by the national consumer price index, of less than 2% per annum. Finally, an innovation will be introduced in the field of money market steering by fixing a target range for the three-month Swiss franc money market rate.
It is generally known that in the past years the seasonally-adjusted monetary base was used as a target variable for monetary policy. Originally, annual growth targets were set. Since the beginning of the nineties, we have been applying medium-term growth targets to enable us to take better account of the fact that the development of the money supply influences the course of inflation notably in the medium term. The medium-term orientation of monetary policy created the necessary leeway for also taking into account other indicators in decision-making processes, such as real economic development, the situation on the labour market and the exchange rate. The deviations from the target path make it clear that the medium-term target was always considered to be a guideline only. In recent years, this has particularly been the case as the monetary base increasingly forfeited its informative value. For this reason, we have decided no longer to announce a growth target for the monetary base. The broad foundation on which our policy rests and which takes all significant indicators into account must become even clearer.
Today, we provide a forecast at year-end for the development of inflation in the three ensuing years. The period of three years takes account of the time required for the transmission of monetary stimuli. It is, of course, not easy to predict inflation for such a long period. Our prognosis will therefore be fraught with uncertainties. By publishing a forecast for the following three years, however, we wish to emphasize the need to adopt a forward-looking stance and to react at an early stage to any threats to price stability.
In general and in the longer term, inflation depends largely on the development of the money supply. Notably the money stock M3 thus remains a useful indicator. In the shorter term, however, other indicators of inflationary development must be considered. The main focus is on general economic development, the situation on the labour market and exchange rates. The National Bank comments the development of the indicators on which the inflation forecast is based on a quarterly basis.
By ensuring price stability, monetary policy makes the best contribution to a balanced macroeconomic development. Price stability is considered to be an inflation rate of less than 2%. This takes account, among other things, of the fact that inflation cannot ever be measured with complete accuracy. Measuring problems may, for example, arise from qualitative changes in goods and services. Once more, it must be emphasized that price stability is not an end in itself. Stable prices are conducive to sustained economic growth and prevent socially undesirable developments.
The National Bank must expect frequent price movements in the short term, which it can only influence to a limited extent. As a rule, these result from unexpected strong fluctuations in the oil price and other import prices and from exchange rate changes. Persistent inflationary and also deflationary developments must, however, be firmly countered.
If the inflation forecast deviates from price stability as defined by us, this has implications for monetary policy. Should inflation exceed its forecast, the monetary reins must be tightened, and vice versa.
For the purpose of implementing its monetary policy intentions, the National Bank fixes a target range for the three-month Swiss franc money market rate. The target range reviewed periodically and is adjusted, if necessary. In this way, the implementation of monetary policy becomes transparent. In return, the discount rate can be abolished.
Against this background, what then are our concrete intentions for the coming year? Generally speaking, a sustained upswing is to be expected. Following an expansion 1.7% in 1999, real gross domestic product is likely to increase by more than 2% this year. Inflation, which amounted to approximately 1%, could rise to 1.5%. Employment will continue to grow.
This development is due to three main causes: the efforts undertaken by the Swiss economy itself, the improved international economic situation and the favourable monetary conditions.
The price development forecast for 2000 will not depend significantly on our current monetary policy. This policy will only have an influence on price developments in the succeeding years. As is generally known, we already adjusted our generous monetary policy moderately in autumn 1999 have tightened this year. To guarantee price stability in the medium term, we will probably have to tighten the monetary reins again slightly in the coming year. Given Switzerland's favourable economic performance, inflation will probably lie in the upper part of the range we equate with price stability. We shall continue to respond flexibly to extraordinary developments such as in the field of exchange rates. In 2000 notably the sustained economic upswing is likely to exert a certain upward pressure on consumer prices. The upward price movement should, however, be dampened by continuing intense competition and falling prices in telecommunications and in the agricultural sector.
The predicted course of inflation is in conformity with the expected development of the monetary indicators watched by us. During the recession of the nineties, the growth of M3 had accelerated considerably in the wake of the National Bank's increasingly expansionary monetary policy. In spring 1997, it began to level off again as the National Bank further relaxed its monetary policy, but to a limited extent only. In 1999, growth in M3 was at a comparatively low level. No inflationary stimuli of note are therefore likely to emanate from the expansionary monetary policy which the National Bank conducted until recently.
SWIZERLAND AS A FINANCIAL CENTRE
A financial centre is by definition the location in which the various financial market players combine their efforts. Conforming to more recent developments, we no longer talk about regional centres in Switzerland. We rather refer to the Swiss financial centre. In the forefront are of course activities of banks and insurance companies. To these must be added a growing number of further providers of financial services. In keeping with international developments, the dividing lines are gradually becoming blurred.
The decisive criteria for assessing the substance of a financial centre are integrity, stability and quality. These depend on various factors of a human and material nature.
On a human level, these factors are know-how and mentality. Integrity, loyalty, reliability and a willingness to serve must go hand in hand with specialist knowledge as well as urbanity and a gift for languages. Our social environment and our educational system basically provide a good starting point. Nevertheless, gaps in specialised training and international experience are still cause for complaint. On a material level, the primary factors are political and economic stability. Both are guaranteed to a high degree. It cannot be overlooked, however, that other countries have made considerable progress in this respect.
In the context of the legal order, banking secrecy is currently at the centre of attention. Applying it is, and remains, a tightrope walk. What is basically undisputed is an adequate protection of the private sphere. This should not, however, lead to such protection being exploited for dubious business deals. In an international context, valid law takes account of this problem in the form of regulations on mutual judicial assistance in criminal matters, which include insider transactions and money laundering. One way or another, it can not be overlooked that legal regulations must be supported by an appropriate business mentality. Problems in the grey area between business as usual and unlawfulness can also affect the integrity of a financial centre.
The relevant environment is, of course, also influenced by fiscal regulations. Here, too, one might refer to a tightrope walk. The implications of subjecting financial transactions to fiscal charges and of spreading the tax burden evenly must be weighed against each other. Aside from economic and operational efficiency, exercising political discretion is indispensable. At the same time, it is clear that growing international involvement restricts the room for manoeuvre.
More recently, endeavours by the EU to close loopholes by taxing interest earnings on capital invested in countries other than the tax domicile have gained attention. Under discussion is a choice between a withholding tax and a reporting obligation. At this juncture, a consensus within the EU is not yet foreseeable. Clearly, a convincing solution would have to include all major financial as well as off-shore centres. If that becomes possible, we would hardly be able to refuse to cooperate in the field of withholding tax. In the event of a comprehensive solution, the effects should be within acceptable limits from a general economic perspective. Finally, attention must be drawn to the organizational and technical infrastructure as an element of the general environment. In this respect, conditions in Switzerland are favourable. Technologically advanced and in some areas pioneering solutions guarantee quick, safe and costeffective business transactions. This is of great value for the integrity, stability and quality of the financial centre even if the respective activities are largely hidden from the public eye.
Apart from the relevant factors already mentioned, the development of financial transactions will be influenced to a considerable degree by changing customer needs and technological innovations.
As regards customer needs, changes in savings and investment habits of private and institutional customers must be pointed out. To this must be added the changing financing requirements and practices of enterprises. Such changes depend on economic developments, but also on trends of which it is difficult to say if they will prove to be of lasting influence.
In the technological field, the primary concern is continued development in data processing and communications. These have implications for the design of products, the conduct of business, international integration and the development of costs and prices. The resulting consequences, for example for the ideal size of an enterprise, are a matter of controversy. As has already been pointed out, the Dividing lines between individual suppliers are becoming increasingly blurred. Moreover, new suppliers, notably among wholesale distributors and in the consumer goods industry, are pressing into the financial area.
As regards retail banking, it may be assumed that the population of a highly developed industrial country will still require financial services in the future. Straightforward transactions tied to a particular location will be of primary importance. These should be carried out rapidly, reliably and cost-effectively. For economic and technological reasons, there will be an increase in providers, and this, in turn, will strengthen competition.
Trading and advisory services with their strong international orientation have shown an impressive development in recent years. Experience has been that this is a line of business which not only offers opportunities, but also involves considerable risks and is very much centred on persons. It seems quite remarkable that all major banks in industrial countries are currently concerned with their strategy in this field.
The future development in portfolio management is of particular significance to us. This is the core business of the Swiss financial industry. Further progress will depend in large measure on what the outlined background conditions will look like in future. In this context, it is the overall situation that counts rather than conditions in a certain area.
OUTLOOK
At the beginning of the year, Switzerland is economically and socially in good condition. Following years of frequently painful adjustments to a changing environment, preconditions for a balanced development are favourable. The quality and scope of these adjustments bear witness to the flexibility of our economy and society. The years ahead will continue to be characterised by constant change. It is therefore important to remain vigilant. On the basis of overall economic as well as social stability, innovative power and flexibility must be preserved. In a mature society, this represents a particular challenge.
By keeping our own house in order, we also make the best possible contribution to international solidarity. In the narrower European context, our bilateral agreements with the EU will form a good basis for cooperation in the coming years. In Europe and beyond, Switzerland traditionally has an extensive network of international relations which we shall continue to cultivate in the future. As far as these relations are of a political nature, an appropriate social consensus is necessary for doing so.
The further development of our financial centre will depend on whether we succeed in continuing to guarantee the attributes mentioned earlier on: integrity, stability and quality. This requires efforts both on an individual and on an overall economic level. A sustained commitment in both spheres will permit existing opportunities to be used.
Introduction
Swiss National Bank
Börsenstrasse 15
PO Box
CH-8022 Zurich
Tel: 41 1 631 3111
Fax: 41 1 631 3911