A new chapter in monetary policy implementation
Dewet Moser, Alternate Member of the Governing Board
Money Market Event, Zurich, 26.03.2015
On 15 January of this year, the Swiss National Bank (SNB) discontinued the minimum exchange rate against a backdrop of growing divergence between the US and the euro area. On several fronts - inflation, economic growth, interest rate expectations and monetary policy - differences had become increasingly acute in the course of 2014. The SNB's decision also marked a new chapter for the implementation of monetary policy in Switzerland.
In the second half of 2014, the foreign exchange market reacted to the widening gap between the two major currency areas. Trading volumes and nervousness rose significantly and the spillover began to affect the Swiss franc: upward pressure on the franc began to mount and turnover in the EUR/CHF currency pair increased particularly strongly from mid-November. In December, the SNB had to intervene in order to enforce the minimum exchange rate. The announcement of a negative interest rate on sight deposits on 18 December brought temporary relief, however early in the new year the situation deteriorated again. It became clear that enforcing the minimum exchange rate would consume more and more resources, with no end in sight.
The minimum exchange rate was an exceptional measure that was directly linked to the foreign exchange market; in order to be effective, the discontinuation thus had to be sudden and unexpected. It was also important for reputational reasons that no market participant should be allowed to gain an information advantage. When the SNB's surprise announcement came, the reaction on the foreign exchange markets - and the financial markets generally - was correspondingly strong. At the same time as discontinuing the minimum exchange rate, the SNB took the interest rate on sight deposits further into negative territory. Interest rates on the money and capital markets fell very quickly in response to this decision, and over time the Swiss franc also weakened again somewhat. In order for negative interest to have the desired monetary policy effect and diminish the attractiveness of holding Swiss franc investments, it must be applied as comprehensively as possible. However, the SNB is conscious that this measure is also associated with some side effects, notably with respect to banks' interest rate hedging.
Notwithstanding the exit from the minimum exchange rate, Swiss monetary policy has not yet normalised - far from it. If required, the SNB will continue to deploy unconventional methods for monetary policy implementation. Equally, it will continue to take account of the exchange rate situation and, if necessary, will intervene in the foreign exchange market.