A tighter monetary policy designed to combat a flare-up of inflation tends to cause business activity to slow down. Such a slowdown may be necessary, for instance to reduce the likelihood of overheating, but it has painful side effects on various sectors of the economy. In pursuing price stability, we must be careful not to lose sight of the costs, and must use tact and discretion. The obligation to take account of the economy is now inscribed in law, but in reality this is nothing new: we have always made the state of economic activity in Switzerland one of our prime concerns. Our massive interest rate cuts in recent years while the economy was in the doldrums is ample proof of this stance. BIS Review 25/2004  3  Having to take account of the economy also means that we cannot be dogmatic in our pursuit of price stability, which must be seen as a medium-term goal. As a small, open economy, we are constantly exposed to external shocks. As our inflation rate tends to be more volatile than that of large countries or economic zones, temporary movements beyond the bounds of price stability cannot be ruled out. Trying to keep too tight a lid on prices would have adverse effects on the economy and would be counterproductive. It is just as obvious, though, that monetary policy has its limits.
While it can contribute to the development of the economy by providing a stable, transparent and efficient monetary framework, we must not expect that it will be able to increase its long-term potential, or that it will succeed in energizing the economic machinery and forcing it to perform beyond its technical capacity. The new legislation now requires us to give an account of the management of our mandate to Parliament and the Federal Council. This obligation towards Parliament is new. It is the logical counterweight of our independence, an independence which has been guaranteed by the federal Constitution since 2000. We are free to choose - within the limits of the law - the means necessary to carry out our mandate; on the other hand, though, the country is entitled to expect us to be able to justify our actions. Lastly, the new Act grants us greater freedom in the choice of instruments to manage our monetary reserves. As you know, the National Bank has considerable monetary reserves. These reserves, which are a national asset, are essential for pursuing an independent monetary policy by reinforcing confidence in our currency. They are thus instrumental in ensuring its stability. It is crucial, however, that these reserves be managed effectively and with due regard to liquidity and security requirements. Over the next few weeks, we will define to what extent we wish to take advantage of the investment possibilities offered by the new Act. We will present our plans on this matter at our press conference on June 17.