The Corona pandemic and the war in Ukraine have fundamentally changed the constraints on central banks and now inflation has risen sharply in several countries over the past year, leading to increased uncertainty, Swiss National Bank (SNB) Chairman Thomas Jordan said in remarks prepared for delivery at the Jackson Hole economic policy symposium.

«In light of the uncertainty, we must take robust monetary policy decisions that will ensure price stability in a broad range of scenarios,» Jordan said. 

The SNB took its first measures against inflationary pressures at the end of last year, announcing at its December meeting it would allow the Swiss franc to appreciate somewhat in nominal terms. But inflation kept outpacing the SNB's forecasts

Stubborn Inflation

Leading up to its meeting in March of this year, the SNB raised its inflation forecast the past four times it met, albeit incrementally, as finews.com reported. That changed as the SNB revised its 2022 consumer price index 2022 to 2.1 percent from its 1.0 percent forecast in December. It seems reality finally took hold. 

Then in June, the SNB reacted to inflation, raising its policy rate for the first time in 15 years, by half a percentage point to −0.25 percent. Jordan said «we signaled that further interest rate moves may be necessary in the foreseeable future. With our policy rate rise, the Swiss franc appreciated further.»

To be sure, inflation in Switzerland is currently lower than in many other countries, a strong Swiss franc helping temper imported inflation, and with a more favorable energy mix in Switzerland, inflation has been comparatively low. Nevertheless, the current level of 3.4 percent is still the highest inflation in Switzerland since the 1990s, Jordan observed. 

Inflation is Spreading

Now, «there are signs that inflation is increasingly spreading to goods and services that are not directly affected by the pandemic or the war in Ukraine. In fact, it appears that in the current environment, higher prices are being passed on more quickly – and are also being more readily accepted – than was the case until just recently. In conjunction with this, longer-term inflation expectations have also been moving upwards slightly over the past quarters. Furthermore, there are clear indications of wage growth gathering momentum,» said Jordan. 

«Had we not raised our policy rate in June, inflation would very probably have been well above this level over the medium term, and thus persistently outside the range of price stability,» he said.

Jordan sought to put the June rate hike into context, saying raising rates too soon or too much could have stalled the economy,  possibly even leading to renewed deflationary risks. Those considerations, however, «were clearly outweighed by the risks of tightening too late. Waiting could have necessitated a more abrupt and stronger rate increase at a later date, with the risk of a more severe economic downturn and threats to financial stability.»

Risk of Underestimating Inflation

Jordan says when the SNB makes its monetary policy decisions, «it is important that we distinguish between temporary and sustained inflationary pressure. The recent rise in inflation may well have been triggered to a large extent by supply shocks with a temporary impact. However, given the difficulty in identifying an increase in sustained inflationary pressure in the current environment, there is the risk of underestimating the persistence of inflation.»

The question now is whether the risks of not being able to identify those inflationary pressures warrant another hike in the benchmark rate to finally prompt the SNB to end the era of negative rates.

 The SNB surprised the markets in June with its rate hike. Will it also make a «robust» decision next month? Investors will find out when the SNB announces its next monetary policy assessment on September 22. Stay tuned.