Over the past year, for instance, the interest rate has not been raised dramatically, but at a more gradual pace, despite a rapid increase in inflation. The Riksbank’s assessment is that a cautious increase in the interest rate is sufficient to bring inflation back around the target of 2 per cent a couple of years ahead. However, the Riksbank’s task is to maintain price stability. This sets a limit as to how restrictive one can be with the interest rate weapon. Without the interest rate increase inflation could have soared similar to the way it did in the 1970s and 1980s. At that time the economic policy did not prevent inflation from becoming entrenched. The inflation target has been set to create conditions for good growth that is sustainable in the long term. An expansionary monetary policy which perhaps contributes to more favourable developments in economic activity in the short term can provide major problems for production and employment in the long term. The most recent decision When the most recent interest rate decision was made, we six members of the Executive Board held differing opinions. I and two of my colleagues voted to raise the interest rate to 4.75 per cent. There have not been many cases where the voting is a “draw” and the casting vote determines the decision; this has happened only four times since the Executive Board was formed almost ten years ago. The result is not particularly strange or surprising given the situation when the decision was made.
The desire to guarantee the purchasing power of our currency underpinned the link established in the past between the franc and gold, and it was this same concern that led Switzerland, in 1973, to abandon the fixed exchange rates of the post-war period, which were undermined by widespread lack of discipline. The objective of price stability is now inscribed in law, which reinforces its legitimacy. Our monetary system is thus now as clearly defined as it used to be under the gold standard. We define price stability as an annual rate of inflation of less than 2%. We were able to maintain such stability in the course of the past year, and I am pleased to note that this objective has been reached in each of the past ten years - an unparalleled achievement internationally. It is a modest, but highly important, contribution to the prosperity of our country. Our history has shown that inflation - or deflation - can have damaging effects that often cause suffering to the most vulnerable members of our society. One of Switzerland’s traditional values is this concern for price stability. It is a significant achievement that the National Bank will endeavour to preserve in the years to come. The new Act also stipulates that we must take due account of the development of the economy in setting any course of action. There can be no doubt that monetary policy has short-term repercussions on economic activity.