OECD Recommends Swiss Tighten Policy Once Inflation Improves
Switzerland’s central bank should start to unwind its ultra-expansive monetary policy once inflation accelerates and the government supplement the effort with fiscal spending, according to the OECD.
The Paris-based group recommends interest-rate increases once consumer-price growth moves toward 1%, saying this would “provide policy space and reduce financial stability risks somewhat.” It also sees a need for clear communication to reduce exchange-rate volatility.
“If the economy is stronger, it can withstand some exchange rate appreciation,” said Christine Lewis, who heads the OECD’s Swiss desk.
The franc’s strength has helped to push down import prices, and Switzerland’s inflation rate has dropped below zero for the first time in three years. The SNB aims to keep it above zero but below 2%.
The OECD recommendation comes amid increasing criticism of the SNB’s negative interest rate from banks, insurers and pension funds. They blame the -0.75% deposit rate for crimping returns and say such a loose policy isn’t needed any more.
The SNB, whose sub-zero rates have been in force for almost five years, says they’re necessary to prevent the franc from appreciating. While inflation was about 1% in 2018, the franc’s appreciation against the euro means the central bank sees it averaging just 0.4% this year.
In Switzerland, where the debt-to-GDP ratio is just 40%, public expenditure is controlled by a debt break to prevent a buildup of leverage. Critics, including the International Monetary Fund, argue the stance is unnecessarily severe.
The OECD echoed that view, calling for Switzerland to spend more to raise long-term growth, such as by investment in programs to tackle climate change and its aging society.
©2019 Bloomberg L.P.