Since the onset of the financial crisis in 2007, the prolonged slump in global growth and valiant efforts by central banks have pushed interest rates even lower. As a small open economy, Switzerland cannot decouple itself from these global developments. On the contrary, exceptionally low interest rates around the globe have farreaching consequences for our economy. In the past, Switzerland has invariably had lower interest rates than its trading partners, namely the euro area countries, as shown in slide 3, where the blue shaded area depicts the difference between short-term interest rates in euros (yellow) and Swiss francs (red). This interest rate advantage primarily reflects the lower average inflation rate in Switzerland compared to other countries, although political stability, sustainable fiscal policy and credible monetary policy also play a role. Investors have therefore traditionally been willing to hold Swiss franc investments at lower yields. This interest rate advantage was for a long time the ‘natural’ state of things in Switzerland. However, in the wake of the financial crisis, this advantage came under mounting pressure. Monetary policy easing on the part of the European Central Bank resulted in a narrowing of the EUR/CHF interest rate differential. In 2014, yields on short-term government bonds in Switzerland were, at times, even higher than in Germany. This caused upward pressure on the Swiss franc to intensify. 2 From a monetary policy perspective, Swiss franc appreciation calls for monetary policy easing, since the exchange rate has a substantial influence on inflation and economic developments in Switzerland.
For the UK that is now around 140%, 35 percentage points lower than in 2009. But is that a good number in macroprudential terms? The virtues of credit – facilitating consumption smoothing, house purchase, investment and risk management mean that more credit is not always bad. And the credit intensity of an economy can increase as intermediation becomes more efficient. But at 140% of GDP it is high by historic standards and higher than the G7 average. One useful leading indicator of financial crises in the past has been the credit-to-GDP gap – that is, the gap between the credit-to-GDP ratio at a given point in time and its trend. For the UK that gap now stands at minus 25%. Does that suggest that credit in the economy is 25% below where it should be? The problem of course is that the credit-to-GDP gap measures the stock of credit in the economy relative to an historic average. For the UK, that average includes a sustained build-up of private non-financial credit from 115% of GDP in 1989 to 175% of GDP in 2009. For this reason we have not attached too great a weight on the credit-to-GDP gap to date. Looking at the flows rather than the stocks, private non-financial sector credit growth has begun to increase but is growing slowly in historical terms at around 2.5%. Of course, it is worth emphasising again that history is not something I necessarily want to repeat.