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KEY ISSUESThe Swiss economy has regained momentum, but inflation remains close to zero. There has been no new foreign exchange intervention, but past safe haven inflows have not yet reversed despite improved market confidence toward the euro area and tapering in the United States. Notwithstanding policy action, risks in the mortgage market remain elevated. The large systemic banks have continued to strengthen capital and restructure their business models, but the financial sector reform agenda is still incomplete.Exchange Rate Policy: The exchange rate floor remains a necessary element of the monetary policy framework, as inflation is still close to the bottom of the range compatible with the Swiss National Bank’s (SNB) definition of price stability and renewed exchange rate appreciation, as might arise from a new bout of safe haven inflows, would quickly bring back deflationary pressures.The Mortgage Market: With monetary conditions remaining accommodative and housing prices growing faster than incomes, measures to curb mortgage demand especially from the more vulnerable households need to be strengthened.The Banking Sector: Cooperation agreements with key foreign supervisors need to be reached to make the large banks resolvable. More resources are required for prudential bank supervision, and closer oversight and guidance to auditors performing supervisory audits are necessary. Deposit insurance should be brought in line with emerging international best practices.

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