On behalf of our Swiss authorities, we would like to thank staff for their valuable report. This report provides a thorough and insightful analysis of the macroeconomic situation, and adds significant value to the domestic policy debate in Switzerland. In most aspects, we share staff’s assessment of the challenges going forward and welcome their candid policy recommendations.
We generally agree with staff on the outlook, and expect growth to remain on a recovery path. According to the latest forecasts of the Federal Government’s Expert Group published in September this year, GDP growth is projected to reach 1.5 percent in 2016 and 1.8 percent in 2017. While we broadly share staff’s assessment of risks, we are somewhat less sanguine that the Swiss economy has already adapted to the appreciation that followed the exit from the exchange rate floor. We still observe slack in the labor market and some underutilization of capital. Further, the effect of the appreciation on exports was more severe in nominal terms, which is reflected in compressed profit margins. The results of the SNB’s regional network survey cited in Annex VII of the staff report attest to this.
The debt brake rule has made an important contribution to the sound financial position of the central government by limiting expenditure to the level of estimated structural revenue. In our view, this helps explain why the Swiss economy has weathered the global financial crisis well and has maintained a strong fiscal position. General government debt stands at 46 percent of GDP, and sound public finances prevail at all levels of government. As mentioned in the staff report, the goal of a balanced structural budget at the federal level has been exceeded in the past, and the resulting structural surpluses have led to a nominal debt reduction. The authorities expect a further moderate reduction in the future, as expenditures generally remain below the budgeted amounts.
However, in contrast with staff, we do not see a need to adapt the fiscal rule in order to allow for higher public spending. The domestic-oriented economy is performing well and fiscal policy is not suitable to address an overvalued currency. Therefore, the fiscal stance is considered adequate in the current situation. A further reduction in debt levels will also help increase Switzerland’s resilience to external shocks. Moreover, as noted in the staff report, population aging will put pressure on the fiscal position over the longer term.
In this context, we agree that fiscal reforms, notably in the area of old age pensions, are necessary to maintain favorable economic conditions and a sustainable social safety net.
We agree with staff that monetary policy needs to remain accommodative to stabilize price developments and support economic activity. Further, we share staff’s assessment that the Swiss franc is overvalued. Under the current circumstances, we do not consider a rebalancing of the SNB’s policy tools to be necessary. We would like to emphasize that the marginal rate is essential for the effectiveness of the negative interest rate policy, as it is the main determinant of market rates. We view the current activity in foreign exchange markets as efficient and effective in mitigating appreciation pressures.
We acknowledge that the Swiss franc’s role as a safe haven currency influences monetary policy but would not go so far as to say that it constrains policy independence. While temporary adverse spillover effects to inflation cannot be completely offset, spillover effects have often proved to be short lived and have not typically offset the SNB’s policy of stabilizing inflation in the medium term. If needed, room is available to ease the monetary stance further to ensure price stability in Switzerland in the medium term. In terms of the SNB’s balance sheet, there are no immediate constraints. We agree with staff that as the balance sheet expands, the risk of valuation losses increases. However, taking a longer-term perspective, we view the potential for sustained losses as limited. At a more general level, it should be recalled that the objective of a central bank is not to generate profits (or avoid losses), but to fulfil its mandate, in particular ensuring price stability.
Financial Sector Policies
The authorities concur with staff that the stricter requirements for G-SIBs under the revised too-big-to-fail regulations (TBTF2) are appropriate. They share staff’s assessment that the size of the large banks relative to the Swiss economy and their systemic importance warrants capital and leverage ratio requirements that are more stringent than international minimum standards. They also agree that attention should be given to model-based risk-weighted assets (RWA) and that improvements in RWA transparency are needed at the international level in order to strengthen the credibility of risk weights. The authorities are of the opinion that the Basel Committee’s reforms to risk-weighted capital requirements are key to reduce the excessive variability in the banks’ RWA and should not be diluted or delayed.
The authorities share staff’s risk assessment regarding developments in the domestic mortgage and real estate markets. While the macroprudential measures introduced between 2012 and 2014 have produced a positive effect, risks remain. The authorities will continue to monitor developments on the mortgage and real estate markets closely. They agree that, should the momentum pick up again, additional macroprudential measures may become necessary, particularly in the build-to-let segment. The authorities also agree with staff that real estate exposures of insurance companies must be closely monitored. It should, however, be pointed out that the total market share of the insurance sector in mortgage lending remains very small compared to the banking sector. Furthermore, the direct real estate holdings of insurance companies have not increased in recent years.
We welcome the analysis of the factors underlying Switzerland’s current account surplus. Several specific factors are important to understand the level and movement of the Swiss current account, including Switzerland’s low inflation, which boosts its net nominal income flows; the treatment of retained earnings of multinational corporations; and various nontraditional flows such as merchanting activities. It should be noted that other factors, such as demographic change, as well as past R&D activity in the pharmaceutical and chemical industries, also play an important role.