And although the downward pressure on inflation from movements in energy prices and the exchange rate are proving persistent, they will not have a permanent effect on inflation. But, there is residual uncertainty about the relationship between the real economy and inflation – something economists refer to as “model uncertainty” – which in this instance augurs for caution in setting monetary policy. 4 The most likely outcome is that wage growth will soon resume its recovery, but there are alternative states of the world in which it takes longer for that to happen. So I judge it prudent to tread carefully, and refrain from voting for an increase in Bank Rate until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target. 4  The effect of uncertainty in the setting of monetary policy is much discussed. Brainard (1967) shows that when policymakers are uncertain about the effects of their actions on the economy, it is appropriate to move more cautiously than if the impact of policy is certain – a strategy known as gradualism. Data uncertainty is another reason why policymakers may adopt a gradualist approach. One common finding is that when data are noisier, a less aggressive response is desirable (Rudebusch, 2001; Orphanides, 2003). In addition, more recently, Evans et al (2015) have argued for delaying lift-off in the face of uncertainty about the strength of the recovery, given a view that there are asymmetric costs associated with the zero lower bound.
It is more important to ensure that the goods markets also adjust and the inflated price level drops - this can be achieved by systematically promoting competition and by reducing state regulations. The eastward enlargement of the EU inevitably begs the question as to whether the rocky bilateral road on which Switzerland has set out will also be a fit for the challenges of the future. Accession to the EU is currently not an issue, however. Reasons for the scepticism of the Swiss people in this regard are manifold. For instance, Switzerland would have to give up the Swiss franc if it joined. This in turn would mean a higher interest rate level and an end to our autonomous monetary policy. 2  BIS Review 69/2004  It was precisely in the past three difficult years, that the possibility of conducting an independent monetary policy proved advantageous. At the beginning of 2001, the Swiss National Bank relaxed its monetary policy before the European Central Bank and, in the following months, also cut its short-term interest rates more drastically than the ECB. In March 2003, we lowered our key rate, the three-month Libor rate, to almost zero. This was in reaction to the deflationary risk in the wake of the strong appreciation of the Swiss franc. We have, in the meantime, pushed our interest rates back up slightly.