A group of prominent economists has recommended that the Swiss Central Bank pay less attention to this outdated policy tool. That's also what the rest of the world should be concerned about.

For millennia, interest rates have been the primary tool for determining the price of money. They determine how medieval kingdoms spent money on distant conquests and how current states engaged in wars. They affect everything from the cost of food, shelter and transportation to healthcare and government spending.

Even the smallest adjustment in interest rates is watched by investors, home buyers, business owners to national leaders. However, the 21st century may mark the end of the usefulness of interest.

Inflation has long been a key driver in setting interest rates. However, price increases, once considered a curse, have been contained in recent decades. We did not have inflation when trillions of dollars of stimulus money flooded the economy after the global financial crisis and inflation was not likely after the huge monetary and financial bailouts of the United States. countries to limit the damage of the Covid-19 pandemic.

Instead, the world is in the grip of a prolonged period of low or near zero inflation. This began after efforts by central banks in the 1980s to stem a rapid rise in prices. as rapidly as a decade ago, and deflationary pressures from the shift of production to low-cost destinations, technological advancement and demographic change.


Meanwhile, even negative interest rates, a radical move introduced a few years ago in Japan, Switzerland and the eurozone, have been largely ineffective in promoting inflation. broadcast.

"That's why wondering about interest rates doesn't work," said Stefan Gerlach, Yvan Lengwiler and Charles Wyplosz, three economists who pushed the Swiss National Bank (SNB) to change its approach. shall.

"It's time for the SNB to realize that interest rate policy has been stuck at -0.75% for over 6 years and it no longer serves as a policy tool," the group said. They also recommend that the SNB openly embrace faster inflation, a concept once seen as heretical, and guide the economy through exchange rates. This approach seems similar to what the Monetary Authority of Singapore is taking.

The above method was practiced in Singapore before the pandemic and global financial crisis and its appeal is understandable. Like Switzerland, Singapore is a small, wealthy exporter and a financial center. Singapore views the exchange rate as the most effective tool for conducting monetary policy and keeping inflation under control, given the size of its economy.

For its part, the SNB also tried to heavily influence the Swiss franc, even limiting it to 3 years. The agency also maintains the deepest negative interest rates in the world. However, the Swiss central bank should acknowledge that money is a financial game, said Lengwiler, a professor at the University of Basel.

Even if inflation picks up over the next few years, the prospect of benchmark interest rates returning to early 2008 levels is slim. This means we need something better to regulate economic life today. In the case of Switzerland, currency would be an available instrument.

There is also a lesson here for the larger economies, even if they can't switch to a monetary-centric policy. The most realistic option is for central banks to refine their approach to inflation. For example, the SNB currently defines price stability as an inflation rate below 2%. However, real inflation has stayed below zero for more than a year. Gerlach, Lengwiler and Wyplosz argue that the inflation target should be set at 2% to achieve the long-term average.

These tips seem to have had a global impact. The US Federal Reserve last year concluded a lengthy review of its monetary framework. For now, they can be comfortable with inflation above target for a while if that's what is needed to sustain 2%.

The Bank of Japan is taking a 3-month review of their extremely loose policy and the results will be announced next month. The Central Bank of India is also weighing its own changes to the ideal rate of price growth. The authors support the Bank of Australia's target of averaging 2-3% inflation over the medium term. That will create a lot of room for policy.

At the present time, the old money management models have not shown it to be forced to replace. The need for creative thinking, however, is not surprising. Even before the pandemic hit, a number of divergent monetary policies were in place. When the pandemic hits, it's time for monetary policymakers to look back, Lengwiler said.