Implementing monetary policy in turbulent times
Dewet Moser, Alternate Member of the Governing Board of the Swiss National Bank
Money Market Event, Zurich, 31.03.2016
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The Swiss franc remains significantly overvalued. Its external value therefore continues to be a key parameter for the Swiss National Bank (SNB). The SNB has a vital interest in the smooth functioning of foreign exchange trading in the two most important currency pairs for the Swiss franc, namely the euro/Swiss franc and the US dollar/Swiss franc. High market quality plays a significant role in ensuring that the twin pillars of current monetary policy, namely negative interest rate on sight deposits and foreign exchange market interventions, produce the desired effect. Two key indicators of market quality are the bid-ask spread and the fluctuation in the prices paid, i.e. the trade margin. The smaller the bid-ask spread and the narrower the trade margin, the lower the transaction costs. This also improves market quality. Low market quality, on the other hand, leads to higher transaction costs and disrupts the price adjustment process. The discontinuation of the minimum exchange rate triggered a dramatic, temporary deterioration in market quality. The fact that these circumstances did not persist for long can be taken as a good sign. The return to orderly market conditions has been an important prerequisite for a modest depreciation of the Swiss franc in recent months, even though various factors have fuelled uncertainty at an international level.
Despite the normalisation of trade in both currency pairs, the SNB cannot rest on its laurels since the market remains fickle. Furthermore, the pace of foreign exchange trading has accelerated greatly in recent years. The SNB therefore monitors events on an ongoing basis and thoroughly analyses market structures in order to make the right decisions with regard to the implementation of its monetary policy. In this connection, the challenge lies in keeping know-how and technical resources always up to date and continuously optimising them to avoid the risk of being suddenly overrun by unexpected developments.
For the implementation of its monetary policy, the SNB is also dependent on a Swiss franc money market that functions as efficiently as possible. It is therefore very important to the SNB that the trading platform, overhauled in February, remains attractive over the long term and that the money market operates on a modern and stable infrastructure.
There has been a revival in activity on the repo market. This is attributable to trading in exemption thresholds, which has ensured optimal liquidity distribution since the introduction of the negative interest rate. Various other central banks have also introduced negative interest rates, although they differ in design. The SNB has chosen a rule-based and across-the-board approach with the fairest possible method of calculating exemption thresholds.