Swiss National Bank rejects higher target as way to boost inflation

© Reuters. FILE PHOTO: The Swiss National Bank (SNB) logo is pictured on its building in Bern, Switzerland June 17, 2021. REUTERS/Arnd Wiegmann

ZURICH (Reuters) - Swiss National Bank Chairman Thomas Jordan ruled out on Tuesday introducing a higher inflation target in Switzerland to help the central bank reach its goal of price stability.

Central banks have been discussing having higher inflation goals as they battle persistent low inflation, although "changing the target does not seem to be the right solution for Switzerland," Jordan said.

The European Central Bank last week set a new inflation target at 2% in the medium term, ditching a previous formulation of "below but close to 2%".

"In order to fulfill our mandate of price stability we will continue to use unconventional policy measures like negative interest rates and foreign exchange market interventions where necessary," Jordan told the event organised by the Bank of Israel.

The SNB defines price stability as an annual inflation rate of less than 2%. In its latest forecast the bank expects an annual price rise of 0.4% for 2021, and 0.6% for both 2022 and 2023.

Theoretically, having a higher target for price increases could boost actual inflation by increasing market expectations and nominal interest rates. This could give monetary policy more leeway to cut interest rates in future.

Over the past six years the SNB has the world's lowest interest rate of minus 0.75% and forex purchases as unconventional tools to fight deflation.

Jordan doubted the benefits of changing strategy would outweigh the costs.

"First, it is unclear to what extent inflation expectations would align easily with the new target, the benefits may be lower than expected," he said.

Announcing a new higher target and failing to reach it in a reasonable time could damage the SNB's credibility, Jordan added, while having higher inflation was costly.

"Unless the inflation target was increased by several percentage points, the policy space would be relatively small," he said.

"Under these circumstances, unconventional policy measures would remain important," Jordan said.

With its current target, the SNB had flexibility to deal with negative influences, and also avoid damaging volatility for businesses in Switzerland, he added.