Since the outbreak of the financial crisis six years ago, the world’s leading central banks have all been pursuing extremely expansive monetary policies. That has prevented a collapse of the international financial system and stabilised the global economy. But the longer central banks maintain such policies, the greater the risks that business, markets and politics get hooked on cheap money.

Central banks’ now familiar ultra lax monetary policies carry many risks and drawbacks. Among them, according a new Avenir Suisse study, are:

  •  The dangers of compromising central bank’s independence
  • The postponement of debt reduction and budgetary consolidation
  • The misallocation of resources
  • Putting off structural reforms
  • The risks of new bubbles in financial markets
  • A redistribution from savers to borrowers
  • The risks of rising inflation

Numerous indicators suggest it may soon be time to wind down ultra cheap monetary policies. Avenir Suisse’s discussion paper weighs up the pros and cons of an exit in technical and political terms and highlights the scale of the challenges facing central banks.

With their speedy and successful measures, national banks prompted high and unrealistic expectations. The danger is that monetary policy will be saddled with extra responsibilities beyond its field of competence and formal responsibility – leading to countless proposals for expanding central banks’ powers. The discussion paper looks critically at these issues, noting the essential role of monetary policy – ensuring price stability – should not be diluted or compromised.

The discussion paper devotes special attention to the Swiss National Bank (SNB). Here, the issue of moving away from ultra low interest rates is intimately linked to that of the temporary exchange rate floor of CHF 1.20: Euro and its future. Avenir Suisse sketches out exit scenarios, analyses the SNB’s room for manoeuvre and looks into the difficulties – and possible resistances – surrounding an exit. One clear conclusion is that the national bank must communicate with the markets and media as transparently as possible.