Questions and answers on monetary policy implementation
How does the SNB implement its monetary policy?
The implementation of monetary policy is the third element of the SNB's monetary policy strategy (Questions and answers on monetary policy strategy). The first two elements are the definition of price stability and the conditional inflation forecast. To ensure price stability, the SNB maintains appropriate monetary conditions. These are determined by the interest rate level and the exchange rate. The SNB sets the level of the SNB policy rate and communicates this in its monetary policy decision. It seeks to keep the secured short-term Swiss franc money market rates close to the SNB policy rate. SARON is the most representative of these rates. If necessary, the SNB may also use additional monetary policy measures to influence the exchange rate or the interest rate level. Among its monetary policy instruments are the remuneration of sight deposits, open market operations for steering liquidity on the money market, and foreign exchange market interventions.
What is SARON?
SARON (Swiss Average Rate Overnight) is a secured overnight rate based on the most liquid segment of the Swiss franc money market. It is calculated on the basis of concluded transactions and tradable prices (quotes) on the interbank repo market. In recent years, SARON has gained in importance in Switzerland as a reference rate for financial products and is today the most representative of the secured short-term money market rates. It serves as the reference rate for financial products such as money market mortgages and floating-rate notes.
What are monetary policy instruments?
Monetary policy instruments are transactions through which the SNB implements its monetary policy. Art. 9 of the Federal Act on the Swiss National Bank (NBA) defines the transactions that the SNB may conduct in the financial market. The SNB distinguishes between open market operations and standing facilities. In the case of open market operations, the SNB takes the initiative in the transaction, while for the standing facilities it merely sets the conditions under which counterparties can obtain liquidity. Regular open market operations include repo transactions and the issuance of SNB Bills. Interest on sight deposits is a monetary policy instrument, too (Questions and answers on repo transactions and other monetary policy instruments). Further instruments, such as foreign exchange swaps (Questions and answers on foreign exchange swaps) and foreign exchange transactions, are available if necessary. Standing facilities include the intraday facility and the liquidity-shortage financing facility, details on which can be found in the Guidelines of the Swiss National Bank on Monetary Policy Instruments and the relevant instruction sheets. They also include the SNB COVID-19 refinancing facility, a temporary standing facility established in March 2020.
How can the SNB implement its monetary policy by means of monetary policy instruments?
The SNB seeks to keep the secured short-term Swiss franc money market rates close to the SNB policy rate. In this regard, the SNB focuses on SARON, the most important reference rate for financial products in Switzerland. The SNB influences money market rates by setting the conditions for interest on sight deposits and by managing liquidity on the money market via liquidity-providing and liquidity-absorbing money market transactions. The choice of liquidity management regime depends on monetary policy requirements and the liquidity structure of the banking system. In order to fulfil its monetary policy mandate, the SNB may also purchase and sell foreign currency against Swiss francs on the financial markets.
What role do sight deposits and the money market play?
In order for a bank to maintain its solvency, it must have sufficient liquidity at all times. A bank's most liquid assets are sight deposits held at the SNB, since they can be used immediately to effect payments and are deemed to be legal tender. Domestic banks hold sight deposits to satisfy minimum reserve requirements. Banks also need sight deposits for payment transactions and as liquidity reserves. The SNB influences sight deposits through the use of its monetary policy instruments. Liquidity adjustments between the individual financial market participants are effected on the money market. Banks seeking to place funds on a short-term basis provide liquidity in the form of a loan to other banks that require short-term refinancing. These loans can be granted on a secured or unsecured basis. If there is ample liquidity in the financial system, the need for banks to adjust their liquidity positions declines and so too does trading activity on the money market. A tiered approach to applying interest to sight deposits (also known as 'tiered remuneration') stimulates trading when institutions with sight deposits over and above their threshold conclude money market transactions with institutions which have not yet exceeded their threshold. An active and well-functioning money market is essential for the transmission of monetary policy and is the basis for the robust calculation of SARON, the most important reference rate in the Swiss franc market. A disruption in the money market impairs the liquidity adjustment process between the market participants and can threaten the solvency of the banks.
What factors influence sight deposits?
As part of its 'Important monetary policy data', the Swiss National Bank publishes average Swiss franc sight deposits held at the SNB during the previous week (Sat-Fri). Changes in the published weekly average can be caused by a number of different factors.
Monetary policy operations play a major role. For instance, when the SNB concludes liquidity-providing repo transactions, total sight deposits increase. When these repo transactions expire, the level of sight deposits falls again. When the SNB buys foreign currencies, it sells Swiss francs, thereby increasing Swiss franc sight deposits; selling foreign currencies has the opposite effect. Other monetary policy instruments also directly influence sight deposits. Liquidity-absorbing instruments such as SNB bills or liquidity-absorbing repo transactions lead to a reduction in total sight deposits. Foreign exchange swaps can be used to provide or absorb Swiss franc liquidity with a corresponding effect on sight deposits. In the case of all these monetary policy operations, it is important to note that several days may elapse between the trading day and the value date, with the transactions only impacting the sight deposits on the value date.
In addition, the use of standing facilities can affect sight deposits at the SNB. If liquidity is obtained by banks under the SNB COVID-19 refinancing facility (CRF), this increases total sight deposits. Repayment has the opposite effect.
Besides monetary policy instruments, other factors can also lead to a change in sight deposits. Cash plays an important role here. If banknotes in circulation increase, sight deposits decline commensurately. It should be noted here that banknote circulation is subject to seasonal fluctuations. Alongside changes in banknote circulation, other factors can also have an impact. For instance, the SNB's annual profit distribution to the Confederation and the cantons can lead to a rise in total sight deposits.
Is the high level of sight deposits at the SNB a sign that banks are hoarding their money at the SNB instead of putting it into circulation?
The total level of sight deposits at the SNB (sight deposits of domestic banks and other sight deposits, i.e. sight liabilities towards the Confederation, sight deposits of foreign banks and institutions, as well as other sight liabilities) can only be changed through SNB monetary policy operations or through exchange against cash. If a bank reduces its sight deposits at the SNB, the amount is either transferred to another sight deposit account with the SNB or is put into circulation. This is why the monetary base, which by definition is made up of domestic banks' sight deposits and banknotes in circulation, can only be changed by the SNB. Growth in lending and monetary aggregates (Notes on the data portal) reflects the extent to which the available liquidity has entered the economic cycle.
What counterparties are admitted to the SNB's monetary policy operations?
In principle, all banks domiciled in Switzerland and the Principality of Liechtenstein with sight deposits at the SNB are admissible as counterparties in monetary policy operations. Other domestic financial market participants such as insurance companies, as well as foreign banks, may be admitted as counterparties in monetary policy operations, provided there is a monetary policy interest in doing so and they contribute to liquidity on the secured Swiss franc money market.