There are, however, two key differences between the present situation and the past. The first is that in Switzerland, like elsewhere in Europe, nominal rates have moved into negative territory in recent years due to low inflation. Central banks introduced negative rates – initially describing them as both an extraordinary and a temporary measure – in a bid to meet inflation targets, echoing the approach taken by the Bank of Japan in the late 1990s as it battled against deflation.
The second difference is that in the past, central banks ushered in negative rates primarily as a means of stimulating an economic recovery in the wake of a recession. Over the last decade leading up to the start of the corona pandemic, [global] GDP growth was relatively robust without giving rise to inflation – thus allowing central banks to normalise their monetary policy. This shows that structural factors have actually been suppressing global inflation since the late 1970s. In addition to the general adoption of an inflation target by central banks, demographics – i.e. the ageing of the population – and globalisation have played a key role in the disinflationary process.
In light of the corona pandemic's depressive effect on economic growth worldwide, it is hard to imagine a return of inflation in the near future. In the medium term, some central banks such as the US Fed and the European Central Bank (ECB) have signalled their intention to tolerate a period of higher-than-targeted inflation to compensate for the low inflation of recent years. This will also influence the SNB's decisions, and everything therefore seems to point to nominal and real rates remaining below zero for some time.In the longer term, the picture could change considerably, however. There is a very real chance that the pandemic could interrupt the advance of globalisation – at least in the short term. One possible scenario is that we may see some production processes being brought closer to end-consumers’ markets. Any such relocation would drive up local demand for labour, increase the pressure on wages and potentially trigger inflation.
Meanwhile, in industrialised nations as well as China and Central and Eastern Europe, it appears that the demographic trends of the last few decades are nearing an end. The expected decline in the size of the workforce has the potential to increase the bargaining power of employees as they demand higher wages. Here again, higher inflation would be a natural consequence of this development.In conclusion, while there are plenty of factors to suggest that the current interest rate picture will persist for now, there is no shortage of reasons to expect inflation to rise and nominal interest rates to return to more conventional levels over the longer term.
