The Swiss National Bank (SNB), and the country’s economic policy in general, have come under fire. A decade after the financial crisis and central banks’ adoption of unconventional monetary policies, demands are growing for a new approach.

The IMF’s latest country report on Switzerland calls on the government to boost spending and raise borrowing to benefit from current ultralow interest rates and boost growth.

The IMF’s conclusions, which have been raised before, are controversial, given the fact that the Swiss economy is performing relatively well, with few fears of a serious downturn, let alone a recession. Moreover, experience has shown that expansionist fiscal policies have, for structural reasons, been less effective at boosting growth here than elsewhere. Better to trust in the country’s automatic stabilizers and avoid tampering with the tried and tested federal debt brake (which the IMF says encourages structural surpluses), argues Avenir Suisse expert Fabian Schnell.

Schnell adds that Swiss spending on infrastructure and education – two key areas for stimulating long term growth – have expanded disproportionately over the past three decades. Nor can one point to any particular weaknesses in Switzerland’s current infrastructure.

While ultralow rates may increase the appeal of particular projects, borrowings must be repaid, and big projects are seldom self-financing once running. That means extra spending should be analyzed rigorously for costs versus benefits, rather than just rubber stamped because borrowing is cheap.

Turning to the central bank …

The IMF also claims negative interest rates curtail the SNB’s arsenal in case of a sudden downturn, as the central bank could hardly cut rates any further. But that ignores the bank’s freedom to influence the exchange rate – even at the cost of further inflating its already massively swollen balance sheet. The risks and rewards of maintaining assets of about CHF 800 bn was revealed just last week, when the Swiss National Bank reported a near CHF 31 bn profit for the first quarter of 2019, compared to big losses previously.

In a separate article, however, Schnell and co-author Reto Föllmi acknowledge some of the technical problems facing the Swiss central bank because of its approach, which bases its interest policy on inflation forecasting.

Negative interest rates prompt asset price distortions by artificially boosting alternatives to bank deposits, such as equities and real estate, leading to altered risk premiums and potential bubbles. And central banks can find themselves more exposed to political pressure, besieged by outright criticism or supposedly ‘constructive’ ideas for policy changes, potentially crimping their credibility. Inflation targeting, while improving transparency, can also tie a central bank’s hands.

New research raises questions

Whether, though, raising interest rates would actually harm growth or stimulate inflation is, moot, the authors suggest. They point to recent macroeconomic research suggesting rate rises after extended periods of negative rates could even have a positive impact on inflation and productivity. Given Switzerland’s export dependence, they acknowledge, however, that any surprise policy change could prompt a significant surge in the value of the franc, with potentially serious deflationary consequences.

Separately, the authors question the effectiveness of the SNB’s policy communications. How a central bank shares its views and plans with market participants has gained importance – evidenced, for example, by the now much more common sharing of once top secret minutes of policy setting meetings. They highlight the SNB’s practice of issuing a specific inflation target but note that, while this improves predictability, it also risks curtailing the bank’s freedom of action.

Given central banks’ emergence after the financial crisis as crucial – but unelected – determinants of public policy, any study of their actions should be welcomed. Avenir Suisse’s authors avoid extreme judgements for the good reasons they adduce, but helpfully provide suggestions for adjustments that could make central bank policy yet more effective.