At the central bankers’ conference in Jackson Hole, SNB President Thomas Jordan opposes higher inflation targets. He also criticizes the trend towards bringing more and more concerns to the central banks that go beyond the core task of monetary policy.
SNB President Thomas Jordan explains the peculiarities of Switzerland in Jackson Hole.
In recent years, at their traditional meeting in Jackson Hole, the central bank governors have repeatedly looked for ways to increase inflation that is perceived to be too low. This year things are completely different. The focus is now on the sharp increase in inflation and the risk of a loss of monetary control. Rarely has the starting point for monetary authorities changed so fundamentally in such a short space of time.
Risk of persistently higher inflationary pressures
Switzerland may still seem like an island of bliss to some participants, especially since inflation, at 3.4 percent, is far lower than in the USA (8.5 percent) or the euro zone (8.9 percent). However, as Thomas Jordan, President of the Governing Board of the Swiss National Bank (SNB), emphasized in a speech in Jackson Hole on Saturday, Switzerland is also struggling with an inflation rate that is “significantly above” the range between 0 and 2 percent that the SNB equated with price stability.
How inflation will develop is also difficult to predict in Switzerland. In particular, the pricing behavior of the companies is unclear. According to Jordan, however, data and surveys show that companies’ long-standing reluctance to raise prices has largely disappeared. Overall, prices have become more flexible, which makes it easier for price increases to spread to more and more classes of goods. It is becoming clear that the increase in inflation can no longer be understood solely as a result of the supply disruptions triggered by the pandemic and the Ukraine war.
No one knows how quickly inflation can be brought under control. However, the SNB President sees structural factors that could lead to persistently higher inflationary pressures in the coming years. According to Jordan, these include the transition to a greener economy, the growing national debt worldwide, demographic developments and, last but not least, the fact that globalization has probably reached its temporary peak. Above all, the decline in globalization could make it easier for companies to push through higher prices.
pragmatism and realism
Under the long-standing impression of low inflation, some central banks have adjusted their inflation target upwards in recent years. This is with the aim of removing interest rates from the lower limit and regaining some scope for interest rate policy. Jordan stressed that this was not an option for Switzerland. It would not only go against the legal mandate of price stability, but would also contradict the “strong preference of the Swiss population for low inflation”. According to the text of the speech, Jordan said: “Higher inflation rates would neither be understood nor accepted in this country.”
In a constantly changing and uncertain environment, two points are particularly important for Jordan: First, the central bank must align itself with a narrowly defined monetary policy mandate. In this context, the SNB President is once again defending himself against the growing number of concerns that politicians are bringing to the central bank and that go far beyond the core mandate of monetary policy. In Switzerland, these include questions of climate protection, wealth distribution or the financing of old-age provision.
Second, Jordan advocated a definition of price stability that seeks to anchor inflation expectations at a low level while leaving some leeway. The head of the SNB rejects a point target of 2 percent for Switzerland, as is the case in the USA or in the euro zone. A certain tolerance for fluctuations in inflation is particularly important for a small, open economy that is constantly exposed to disruptions from abroad. Jordan also sees a “sign of pragmatism and realism” in the broad target range of the SNB.