The financial markets and the implementation of monetary policy
Dewet Moser, Alternate Member of the Governing Board
Money Market Event, Geneva, 19.11.2015
Following the discontinuation of the minimum exchange rate in January 2015, the Swiss National Bank (SNB) is still moving in unfamiliar territory in monetary policy implementation, with the adoption of a range of exceptional measures. In a two-pronged approach, it intervenes in the foreign exchange market as necessary, and charges negative interest on sight deposits held at the SNB by banks and other financial market participants.
When the crisis in Greece dramatically worsened at the end of June, for instance, the SNB confirmed that it had intervened in the foreign exchange market in order to stabilise the situation. With this step it sent out a clear signal to market players that, notwithstanding its discontinuation of the minimum exchange rate, it remains prepared to take decisive action. The SNB continues to monitor developments on the foreign exchange market very closely with respect to both monetary policy itself and also its implementation.
In the case of the negative interest rate, the SNB has opted to apply an across-the-board solution with as few exceptions as possible. The level of the individual exemption threshold is calculated according to clear rules. The negative interest rate thus achieves the desired effect in monetary policy terms without placing an unnecessarily heavy burden on the financial system and payment operations. The level of sight deposits is currently well above total exemption thresholds. Therefore, if the SNB provides further liquidity to the system via the foreign exchange market, pressure on the banks to pass on the negative interest rate to large investors will mount. This makes it even less attractive to hold Swiss francs. Furthermore, exemption thresholds are now being almost completely used up. The repo market has contributed to this liquidity adjustment process.
Despite the negative interest rate environment, there is still a strong need for reliable benchmarks. Consequently, the SNB is persevering with its work in internationally coordinated reform efforts on reference interest rates. However, these efforts can only bear fruit if market participants also play an active role. Yet a well-functioning financial market requires not only robust reference rates, but also a modern and stable financial market infrastructure. The Swiss money market trading platform is to be extensively overhauled and expanded in February 2016. This will make it possible for all aspects of a repo transaction to be administered by the same system. The SNB is not just active in the money market. It also makes a contribution to the diversification of the foreign exchange market. A current example of this is the financial cooperation with China in the context of the growing international significance of the renminbi.