MNI POLICY: SNB Should Reform CPI Target, Stress Franc -Report

The Swiss National Bank should replace its "inflation comfort zone" of 0% to 2% with a medium-term inflation objective centered at 2% and formally acknowledge the exchange rate has become its "overriding concern," a report by a group of influential Swiss-based economists has concluded.

The Swiss National Bank "enjoys an excellent reputation for keeping inflation in check better than other central banks," Stefan Gerlach, Yvan Lengwiler and Charles Wyplosz write. However, "without clear and powerful statements, the history and culture of the SNB of being vigorously hawkish about fighting inflation makes a positive inflation objective not credible."

"The ability of the SNB to steer the economy and avoid deflation seems to be slipping," they continue. "Clinging on to the status quo is a risky proposition," while the SNB's focus on keeping inflation in check "unduly restricts monetary policy and prevents urgently needed monetary stimulus," the authors of the SNB Observatory paper add. "A revision of the strategy is needed now."

DEFLATION IS A PROBLEM

Among the measures suggested, the SNB "has to make clear that inflation below the 2% objective is as undesirable as inflation above it, and that deflation is a serious problem."

The policy rate has ceased to function as a policy instrument after more than six years at -0.75% it is claimed, while the exchange rate now plays a crucial role in the pursuit of price stability - a situation the SNB should recognise officially, Gerlach, Lengwiler and Wyplosz argue.

Given the SNB's undoubted credibility, the central bank can also afford to be much more forceful, transparent and "frank" in its communications, they add. "The macroeconomic situation has shifted considerably over the last decade," Gerlach, Lengwiler and Wyplosz conclude. "All major central banks are revising their strategies now. The SNB should do the same, and seek views outside its walls."