Thomas Jordan: Monetary policy and the business cycle Summary of a speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the 75th anniversary celebrations of the KOF Swiss Economic Institute, Zurich, 23 September 2013. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  Monetary policy contributes to the prosperity of an economy by ensuring price stability in the medium and long term. This makes it possible to put resources to more efficient use, from an economic point of view, and also promotes investment and, with it, long-term growth. Price stability also helps to avoid undesirable distribution effects. Households with lower incomes derive particular benefit from this. Monetary policy can be used to dampen cyclical fluctuations. However, it is not suitable for short-term fine-tuning of the economy. From the point of view of the business cycle, the goal of monetary policy must rather be the reduction of larger risks and the alleviation of extreme situations. An example of one such measure is the minimum exchange rate, which the Swiss National Bank (SNB) set on 6 September 2011 to halt the Swiss franc's upward trend, thus averting a deflationary spiral and warding off the danger of a serious economic crisis. Monetary policy decisions are always subject to uncertainty. It is therefore of key importance that the SNB has a sound decision-making basis.
However, it is also in the big banks’ own interest to hold sufficient loss-absorbing capital, as a high level of resilience strengthens their competitiveness in the core business of wealth management, and boosts market confidence. Situation at domestically focused commercial banks I would now like to turn to our assessment of domestically focused commercial banks. There are clear and growing signs of a build-up of imbalances on the Swiss mortgage and real estate markets. Over the past 12 months, mortgage lending volumes and real estate prices have once again grown strongly. Thus, the mortgage-to-GDP ratio, which was already high in a historical comparison, continued to increase. At the same time, residential real estate prices have reached levels that, in some cases, exceed those that can be justified by fundamental factors, such as demographics or per capita income. Taking the national average, this is the case for prices of owner-occupied apartments. In some regions such as Lake Geneva, Lake Zurich and Lake Zug, this is the case, on average, for all segments of the residential property market. 2  BIS central bankers’ speeches  Under the baseline scenario, the momentum in the mortgage and real estate markets continues. It is therefore to be expected that imbalances will continue to build up, and that, consequently, the risk of an abrupt correction of these imbalances will increase over the medium term. For domestically focused commercial banks, average capitalisation relative to regulatory requirements is at a historically high level.