On the one hand, the central bank’s legitimacy among the general public could suffer if short-term interest rates have to move sharply, causing output to fluctuate widely while inflation is held stable and exactly on the target. Maximum stability in output could, on the other hand, result in sharp fluctuations in the rate of inflation and erode the credibility of the monetary regime. A point somewhere midway between the two extremes must therefore be found. Let me also stress the importance of central bank independence. In order to be successful with the implementation of an inflation target approach, the central bank must be able to act independently of day-to-day party politics and to set interest rates continuously according to the specified inflation target. Otherwise a credibility problem arises because it will be hard for policymakers to convince the general public of monetary policy’s long-term nature. Lack of credibility, in turn, means that the central bank has to set its interest rates higher than otherwise would have been the case. Looking ahead, I believe there are at least two major questions that central banks have to address more thoroughly. First, how should monetary policy react to asset prices, such as equity and/or real estate prices? We know from history that the development of asset prices can have a significant impact on both inflation and real economic activity.
The number of individuals affected by short-time working was rising fast at the beginning of the year, and unemployment is increasing at a regular pace. This trend is likely to persist in the next few months since the leading indicators of labour demand are falling sharply. Nevertheless, it is to be hoped that the signs of improvement observed abroad will be gradually transmitted to the Swiss economy. From the second quarter, the decline in exports is likely to slow down. However, growth figures will probably remain negative over the next few quarters due to the weakening in domestic demand as well as the reduction of inventory levels. For 2009 as a whole, the Swiss National Bank (SNB) continues to forecast a reduction in GDP of between 2.5% and 3%. These figures are still relatively moderate by comparison with other countries since Switzerland benefits from the broad diversification and relative flexibility of its economy. Even so, I wish to stress that the risks attached to our forecast are clearly skewed to the downside. Changes in monetary and financial conditions How have monetary and financial conditions developed since our last assessment in March? Let us begin by looking at movements in interest rates on the money and capital markets as well as currency movements on the foreign exchange markets. On the money market, three-month Libor moved down, but not as far as we would have liked. Its decline was checked by the level of risk premia, and it currently stands at around 40 basis points.