Monetary policy implementation: How to steer interest rates in negative territory

Andréa M. Maechler / Thomas Moser, Member of the Governing Board / Alternate Member of the Governing Board

Virtual Money Market Event, webcast, 05.11.2020

A well-functioning money market is vital for the financial system and the economy as a whole. This market is not only important for liquidity redistribution between banks; it also provides the basis for determining reference rates, which perform a key informational function for the economy, particularly in the capital and derivatives markets. SARON is establishing itself as the reference rate for loan products denominated in Swiss francs and is replacing Libor. In addition, a well-functioning money market is essential for the transmission of monetary policy.

Like most central banks, the Swiss National Bank (SNB) steers interest rates on the money market. It uses the SNB policy rate in taking and communicating its monetary policy decisions. In the current environment, the SNB uses the negative interest rate on banks' sight deposits held at the SNB as its main instrument for keeping secured short-term Swiss franc money market rates close to its policy rate.

It is not necessary for all sight deposits to be subject to the negative interest rate in order to keep secured short-term money market rates close to the policy rate. The SNB grants banks exemption thresholds in order to limit the burden on the entire banking system to the minimum deemed necessary for the implementation of monetary policy. The steering of money market rates works even in negative territory.

The SNB made two adjustments - one in November 2019 and one in April 2020 - which resulted in higher exemption thresholds overall. These changes significantly reduced the burden on the banking system as a whole. They also broadened the scope for liquidity redistribution between banks, which caused trading volume on the repo market to rise. The increased exemption thresholds led, at times, to upward pressures on SARON. The SNB countered these pressures by conducting fine-tuning operations and auctioning one-month funds.

To function smoothly, the money market requires a sound and efficient infrastructure. In order to keep up with rapidly evolving technological innovations and market participants' needs, the Swiss Money Market Value Chain is adapted on a rolling basis. The SNB is committed to supporting the ongoing development of Switzerland's money market infrastructure to ensure that it remains fit for purpose in the future.