SNB’s Jordan Sees High Debt Risking Central-Bank Independence

(Bloomberg) -- Swiss National Bank President Thomas Jordan said monetary and fiscal policy must be clearly separated to preserve the central bank’s independence and ensure it can focus on its goal of price stability.

Governments have unleashed historic fiscal stimulus in the face of the coronavirus pandemic, in the process ramping up their debt burdens. That strategy has been largely enabled by massive central-bank stimulus such as bond purchases and negative interest rates, which has kept borrowing costs ultra-low.

“In a crisis, that may be the right thing to do in terms of monetary policy, but it must not be done for reasons of state financing,” Jordan said in the text of a speech for delivery in Zurich on Thursday. Central banks must “remain independent in practice and not just on paper. It is particularly important to avoid scenarios where excessive government debt means that a central bank is de facto forced into making its decisions dependent on their impact on public finances.”

Jordan’s remarks reflect concerns that when economies recover from the current crisis and inflation starts to pick up, central banks will be unable to tighten policy because heavily indebted governments won’t be able to afford higher interest rates.

Monetary policy makers have already been under political fire in recent years -- including in the U.S. -- prompting concerns that the era of central-bank independence is at risk of coming to an end. European Central Bank researchers highlighted that trend in a paper this month that looked at 13 jurisdictions.

While Switzerland’s debt burden remains under control, Jordan stressed that the crisis had fueled demands for the SNB to make larger payouts to the government.

“There are two things to bear in mind here. On the one hand, the size of any distribution depends on the earnings potential of our investments,” he said. “And on the other hand, a central bank’s equity must be sufficiently high to cover the risks in its balance sheet.”

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