In March 2003, we even pushed interest rates down to 0.25% in an attempt to stop the Swiss franc from appreciating and deflationary tendencies from developing. The ECB lowered its rate by only 25 basis points, down to 2.5%. Consequently, the interest rate differential between the euro and the franc rose from 1.25 percentage points to a maximum of 2.25 percentage points between December 2000 and spring 2003. These three episodes suggest that the SNB made use of its monetary independence when faced with country-specific shocks. Shadowing the ECB's policy would not have been appropriate given the circumstances. Monetary policy in the absence of asymmetric shocks Let me now turn to the question of whether the SNB's monetary policy differed in any important way from the ECB's during times when there were no major asymmetric shocks. Insofar as the euro area and Switzerland were exposed to the same shocks during such times, we would expect to see  6  BIS Review 46/2006  identical policy reactions. The comparison of the course of interest rates in the euro area and Switzerland yields three interesting results. First, interest rates in Switzerland lie below those in the euro area. This reflects the Swiss interest rate advantage. Since January 1999 – the date of the introduction of the single currency in Europe – the average 3-month interest rate on euro deposits has been 3%, and the average 3-month Swiss franc rate, 1.4%.
Credibility The first is the need for a highly credible central bank. If the public believes that the central bank will not deliver on its promise to keep inflation low and stable, price stability is difficult to preserve. In this case, joining a monetary union whose policymakers are seen as more credible may be the easiest way to anchor inflation expectations. Luckily, the SNB enjoys high credibility at home and abroad. Average inflation over the last 20 years amounted to 1.8%, and the Bank proved on many occasions that it was ready to act in order to defend price stability even in difficult situations. Moreover, the SNB was granted formal independence in 2000 through a constitutional amendment. Such independence is commonly seen as a means of enhancing the credibility of a central bank, since it limits the influence of the government, which may have an interest in keeping interest rates low, and thus stoking inflation. In my view, however, the formal independence we got in 2000 is unlikely to have changed the public's perception of the SNB much, as the Bank enjoyed de facto independence already before that date. Of course, our credibility rests on a commitment to price stability that is not just our own, but one that is also shared by the government and the population at large. An important determinant of a central bank's credibility is its operational independence. Successful monetary policy is based on thorough economic analysis and professional implementation.