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Monetary Policy Options

The reappearance of inflation in 2021 has elicited a two-step reaction from the SNB. First, it allowed the exchange rate to appreciate. Second, it has started to raise its interest rate. As it continues battling inflation, which of these two strategies will it pursue? The choice can be driven by the implications of each one on different segments of the economy. Another criterion concerns the size of the balance sheet which has considerably grown over the recent decade as the SNB was preventing an overvaluation of the franc. While the interest rate-only strategy will leave the size of balance sheet roughly unchanged, the exchange rate-only strategy will lead to a reduction of the balance sheet. A mix of the two strategies could be a compromise between different objectives. This report starts a debate on this choice.