Why one central bank defines price stability as a ceiling, not a target

Almost every central bank that publishes an inflation objective states it as a number to aim at. Switzerland does something different, and the difference is not cosmetic: it changes what counts as success, and the reasoning behind it is a short lesson in what an inflation statistic actually measures.

Key Takeaways

• The Swiss National Bank equates price stability with CPI inflation of less than 2 per cent per annum.
• Deflation, a sustained decrease in the price level, also breaches the objective.
• The threshold is not zero because measured inflation tends to be slightly overstated.
• The reason is quality improvement, which the index does not fully capture.
• The mandate comes from Article 99 of the Federal Constitution and the National Bank Act.

A ceiling with a floor beneath it

The Bank's formulation is compact: it equates price stability with a rise in the Swiss consumer price index of less than 2 per cent per annum, and states that deflation, a sustained decrease in the price level, also breaches the objective of price stability.

Read those two clauses together and what emerges is a region rather than a point. Above the ceiling is not price stability. Below zero is not price stability. In between is. Compare that with a bank that named a single number and committed to reaching it.

That is a genuinely different instruction from a target. A bank aiming at a point is, in principle, always trying to move towards it. A bank charged with keeping inflation inside a region is not obliged to act while conditions are inside it, whatever the reading happens to be that month.

Why the line is not at zero

Here is the part worth understanding, because it applies to every inflation statistic anywhere.

The Bank explains that its definition takes into account that inflation cannot be steered with pinpoint accuracy, or measured precisely, and that measurement problems arise, for example, when the quality of goods and services improves. Such changes are not fully taken into account in the CPI calculation, so measured inflation tends to be slightly overstated.

The mechanism is straightforward once stated. A price index compares the cost of things over time. If a product costs the same this year but is better - faster, more durable, more capable - then the true price of what the buyer receives has fallen even though the observed price has not moved. Statistical agencies adjust for quality where they can, but not perfectly and not everywhere.

The consequence is that a measured inflation rate of zero probably corresponds to genuinely falling prices. A ceiling set slightly above zero is an allowance for that bias, and the Bank says so.

That reasoning is the most useful thing in the whole framework, and it generalises. Any target above zero anywhere is partly an acknowledgement that the instrument is imperfect.

Where the mandate comes from

The framework is not the Bank's own invention from top to bottom.

Article 99 of the Federal Constitution entrusts the Swiss National Bank, as an independent central bank, with the conduct of monetary policy in the interests of the country as a whole. The National Bank Act sets out the mandate in more detail, requiring the Bank to ensure price stability and, in doing so, to take due account of economic developments.

Two constraints inside that are worth drawing out. The Bank is charged with resolving conflicts between price stability and the business cycle in the best general interests, giving priority to price stability. And the requirement to act in the interests of the country as a whole means gearing policy to the needs of the entire economy rather than to the interests of individual regions or industries.

A central bank in a country of distinct linguistic regions and very different industrial bases is being told, in its founding instrument, that it may not favour any of them.

How the definition is put to work

A definition alone would not tell anyone what the Bank is going to do, and the strategy has two further elements that connect it to action.

The second element is the conditional inflation forecast, which the Bank describes as the main indicator for its monetary policy and as a central instrument of communication. Conditional is the operative word: the forecast is published on the assumption that policy stays as it is, so it is a statement of where inflation would go if the Bank did nothing. That turns a forecast into an argument. If the conditional path leaves the region the definition marks out, the case for acting is made by the Bank's own published numbers rather than asserted separately.

The third element is implementation, and it is where Switzerland differs from most: the Bank influences both the interest rate level and the exchange rate. For an economy of this size and openness, the exchange rate is not a by-product of monetary policy but one of the channels through which it works.

So the framework reads as one piece. A region rather than a point defines success; a conditional forecast says whether the region is about to be left; and two instruments, not one, are available to do something about it.

What a definition like this does

Three things follow from defining an objective rather than naming a target.

It sets the burden of action differently. Inside the region there is no automatic case for moving; outside it there is.

It makes both directions failures, explicitly. A framework that named only a ceiling could be read as treating falling prices as an overachievement. Naming deflation as a breach forecloses that reading.

And it is honest about measurement. Rather than presenting a number as though it were exact, the framework says in its own terms that the instrument is imprecise and that the threshold is set accordingly.

Where to look next

The AUD to CHF page carries the live reference rate and a short block on Swiss cash, including the thousand-franc note. For a different approach to the same problem, how the Bank of Japan turned a statutory phrase into a number covers a bank that did name a point target and explains where the number came from.

Sources

• Swiss National Bank, Monetary policy strategy - the definition of price stability as a rise in the Swiss consumer price index of less than 2 per cent per annum, deflation as an equal breach, the reasoning about imprecise measurement and unrecorded quality improvement, the Article 99 and National Bank Act mandate, the priority given to price stability in a conflict, and the requirement to serve the entire economy rather than particular regions or industries

General information about how a central bank defines its objective. Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.