An overview of the effects of monetary policy in Switzerland on GDP and inflation, from 1981 to the present day.
% annual growth rate:
Sources: M3 from Swiss National Bank and nominal GDP from IMF database, as at September 2023
The medium-term relationship between money and nominal GDP growth in Switzerland, 1981-2022
Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period
Comment on monetary trends in Switzerland
Switzerland is one of the world's most highly developed and advanced free market economies. Although the country has had a long-established textile industry and is also a major producer of high quality manufactured items, notably watches and clocks, the economy is dominated by the services sector, banking and tourism in particular.
The Swiss National Bank was established in 1907. It is independent of state control and its shares are partly owned by public bodies, including the cantons and banks, but 45% are in private ownership. Its principal mandate is price stability, which it equates to an inflation target of between 0% and just under 2%. The SNB has been remarkably successful in avoiding high inflation, with only one instance in the last 25 years of consumer prices rising at an annual rate of more than 3%. The strength of the Swiss Franc, thanks to its popularity with investors due to its perceived stability, has resulted in no fewer than four episodes of moderate deflation in the decade 2010-20.
Thanks to being so closely linked to other major economies due to its strong emphasis on free trade, the Swiss economy was affected by the downturn of 2002-3 and the global financial crisis of 2007-8, with the economy contracting in 2009 as a result of a decline in investment income from abroad. This contraction took place in spite of very loose monetary policy by the SNB to prevent overvaluation of the Swiss Franc, which led to broad money growth continuing at a relatively high level. Two years later, the SNB sought to cap its appreciation against the Euro, setting a ceiling of 1.2 francs to the Euro, which again meant a loose monetary policy which resulted in strong broad money growth while GDP growth remaining rather sluggish. The ending of the cap in 2015 saw the Swiss Franc appreciate and GDP growth improve, leading to a closer convergence between nominal GDP and broad money growth. In the last seven years, monetary policy has not been tightened at all, even though many other central banks are now raising interest rates as a result of rising inflation.
Although the Swiss economy has not grown dramatically in recent years, its predominant feature compared with many other countries continues to be its consistency - moderate but steady growth. The Swiss response to the 2020 coronavirus pandemic was much more modest in scale than those of many other developed nations. Money growth did not rise to excessive levels and consequently, inflation rose no higher than 3.4%, falling back below 2% by mid-2023.