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.
Today, the euro is providing market stability, which is also beneficial to third currencies like the Swiss franc. In monetary affairs, size does not really matter, but the rules of the game are more challenging for small countries than for large economies. Small countries have no choice but to respect market realities. They have to accept exchange rate flexibility even if, in the short run, some exchange rate development might interfere with the interests of their export sector. If they were to complement inflation targets with specific exchange rate objectives, they would create market confusion and destabilise expectations. The implementation of a clear and coherent monetary strategy is of the essence. In my view, smallness in combination with monetary independence and flexible exchange rates is a strength rather than a weakness. For us, being able to set our own monetary policy has meant that we could react to country-specific shocks. Had we joined the euro area, we would not have had this flexibility. Furthermore, monetary independence is attractive for small open economies, because policymakers can concentrate on national data when setting interest rates. In a monetary union, data from different countries have to be combined. Also, the decision process in the union is more complicated, since there are diverging interests to be reconciled. As a consequence, monetary policy is more inertial than in a small open economy with a currency of its own.