Editions

A recent study by KOF analyses the impact that central bank communication has on financial markets, which are a key transmission channel for monetary policy. The findings show that monetary policy speeches are an important source of information for the formation of expectations in financial markets. The findings also suggest that volatility in financial markets increases when a central bank communicates too complexly.

Alexis Perakis, monetary policy expert at KOF, talks in this interview about his predictions for inflation, interest rates and the Swiss franc exchange rate this year. He considers the current debate about interest-rate cuts to be premature.

In today’s ever-changing global economy, clear and effective communication by central banks is crucial to build trust in their policies and manage public expectations. A new study by researchers at KOF and ETH uses an experiment to investigate how central banks influence inflation expectations through different media formats and which communication formats are most effective.

Central banks shape global financial markets through their carefully crafted speeches. Words often trigger immediate market reactions and provide a more timely signal than many regularly updated economic indicators. When compiling its analysis, KOF uses natural language processing to decode indicators from central bank transcripts that make it possible to replicate and predict market movements in a timely manner.

At first glance, ‘bail-in bonds’ are an attractive way of recapitalising banks in distress. In the case of Credit Suisse, however, according to FINMA, loss buffers amounting to over CHF 50 billion were not activated for recapitalisation purposes because no compulsory restructuring was ordered. Bail-in bonds, which can only be written off or converted into equity through state intervention, present a number of pitfalls, which are discussed in this article.

KOF Director Jan-Egbert Sturm explains why the rescue of Credit Suisse was the right thing to do and assesses the macroeconomic consequences of its takeover by UBS.

Central banks in Switzerland, the euro area and the United States are raising interest rates swiftly. In the long term, however, KOF expects to see lower rates return.

The continuing rise in prices is forcing the central banks in the United States and Europe to reconsider their highly expansionary monetary policies. The Swiss National Bank will probably only reverse its policy stance once central bankers in the euro area have implemented their first interest-rate hike.

KOF Director Jan-Egbert Sturm talks in an interview about the latest price increases in almost all currency areas, central banks’ potential counter-strategies and why inflation in Switzerland remains moderate.

Inflation rates have risen significantly over the past year. In the United States in particular, inflation is increasingly becoming a problem to which the Federal Reserve (Fed) must respond. Inflation has also risen sharply in the euro area. In Switzerland, the situation is still somewhat less serious.

KOF economist Alexander Rathke talks about rising prices in the United States and Europe, the special case of Switzerland and the challenges of monetary policy over the coming years.

Reality for much of the year so far during the coronavirus crisis has consisted of lockdowns, working from home and living a dreary everyday existence while stock markets have kept hitting new highs. However, there are academic explanations for this apparent contradiction.

At the beginning of 2015 the Swiss National Bank abandoned the franc-euro minimum exchange rate, triggering a deflationary shock. How did incomes and unemployment of workers with and without rigid wages react to this?

The European Central Bank’s main communication channel is the press conferences it holds following its Council meetings. In addition to its decisions on monetary policy measures, the Council also outlines its view of the economic situation in the euro area. Although the subtle differences between the introductory remarks made are often barely perceptible to laypersons, investors and economists react to them and revise their expectations accordingly.

Since 2015 the Swiss National Bank’s base rate has been in negative territory. Do the benefits of negative interest rates outweigh the drawbacks, or vice versa? How is the base rate expected to change over the next few years? And how are the current policies of the SNB, the ECB and the Fed to be assessed? A survey of Swiss economists carried out in December 2019 attempted to cast light on these issues.

Five years after the suspension of the minimum exchange rate of the Swiss franc, the manufacturing industry is still complaining about lower competitiveness on the eurozone markets and the excessive strength of the Swiss franc compared to the euro. For the majority of companies, the advantages and disadvantages of the negative interest rate policy balance each other out. However, as a special KOF survey shows, financial institutions have a very different view on the matter.

With big central banks once again focussing on more expansive monetary policies, the Swiss National Bank is under pressure to act. In response, the Bank could further reduce the key interest rate or step up its foreign currency purchases – which may, however, lead to problems with the USA. KOF expects a cut in key interest rates.

After the global financial crisis, lending to companies slowed down considerably in the eurozone. The European Central Bank chose unconventional measures to alleviate the situation. According to a current KOF study, small and medium-sized enterprises have benefited from the ECB’s quantitative easing – albeit to different degrees in different countries.

The FED is in the process of pushing interest up further and reducing its balance sheet. In the Eurozone, the ECB has also taken a further step towards abandoning its ultra loose monetary policy. This is the environment in which the Swiss National Bank is currently operating.

US monetary policy is gradually easing up. Increasingly, there are signs that a change in monetary policy may also become possible in Europe, albeit with a significant delay. In the meantime, the Swiss National Bank (SNB) is carrying on with its two-pillar policy.