If firms in the tradable sector have plenty of spare capacity you’d expect net export volumes to rise significantly; once capacity constraints start to bind you’d expect greater Source: ONS and Thomson Reuters Datastream  investment; in general, given that the degree of spare capacity is bound to vary across firms, you’d expect to see both. I think this is what you have seen in the past – in both directions. The data are limited. Detailed sectoral numbers on profits and investment exist only from the early 1990s and until 2014. But that period does at least cover two significant moves in the currency, even before the financial crisis: the big drop when sterling fell out of the European Exchange Rate System (ERM) in 1992, after which the exchange rate remained relatively low for a few years; and the equally large re-appreciation in 1997 and 1998. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  As it happens, I think these swings can be traced back to the demand-side influences I discussed in the last section. Subdued domestic consumption, public as well as private, supressed the exchange rate in the years after sterling exited the ERM; much stronger growth, associated in part with the revival in the housing market, helped to push it back up later that decade (you can see these broad movements back in Chart 3).
Over the past five years, Switzerland has  BIS central bankers’ speeches  5  been the sixth largest FDI investor and eight largest job provider through foreign investment in the U.S.13 Conclusion: the current account and SNB monetary policy Let me return to the question of Swiss monetary policy and the current account posed at the beginning of my speech. I have argued that the key components driving Switzerland’s current account surplus – notably financial services, merchanting, and direct investment income – are not closely linked with either the exchange rate or the domestic economic situation. I have also argued that, historically, an appreciation of the Swiss franc has not led to a reduction in Switzerland’s current account. Yet this disconnect between the exchange rate and the current account balance does not diminish the exchange rate’s importance for the Swiss economy. Given the high degree of openness of our economy, the exchange rate – next to the interest rate – is the key definer of monetary conditions and thus has a strong impact on both prices and production. The Swiss economy has shown in the past that it can handle volatility and appreciation in the real exchange rate when these are based on fundamentals. However, excessive and abrupt appreciations driven by financial market turmoil have a disruptive impact on prices and production, resulting in deflation and recession. What, in practical terms, does this mean for the SNB’s monetary policy? It means that we do not gear our monetary policy to the current account.