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Luncheon: The policy rate raise of the Swiss National Bank

Luncheon: The policy rate raise of the Swiss National Bank

Tokyo (SCCIJ) – The October Luncheon provided insights into why and how the Swiss National Bank has recently raised the interest rate back into positive territory. The speakers were Andréa M. Maechler, Member of the Governing Board, and Thomas Moser, Alternate Member of the Governing Board, of the Swiss National Bank. We are presenting their talk in Q&A form.

Luncheon: The policy rate raise of the Swiss National Bank

Ms. Maechler and Mr. Moser of Swiss National Bank spoke at the SCCIJ October Luncheon.

Why did the Swiss National Bank (SNB) raise its policy rate in September from negative 0.25% by 0.75 points to positive 0.5%? This was already the second hike this year.

Ms. Andréa M. Maechler: Inflation in Switzerland has been low going back to 2005. The last time we raised rates was 15 years ago. However, this prolonged period has come to an end of late, and we must therefore counter the return of inflationary pressures and the spread of inflation to goods and services which have, so far, been less affected.

Mr. Thomas Moser: Central banks have been surprised by the pace of inflation. There are lots of temporary elements there, like supply chain interruptions and the war in Ukraine. A bit surprising was how quickly these factors have caused broader price rises. Fortunately, we in Switzerland are still at a somewhat comfortable level, as is Japan.

Luncheon: The policy rate raise of the Swiss National Bank

SCCIJ October Luncheon speaker Ms. Andréa M. Maechler.

What are the SNB’s inflation expectations for the following years?

M. Maechler: We base our conditional inflation forecast on the assumption that the policy rate is 0.5% over the entire forecast horizon, which currently extends to mid-2024. At the end of the forecast horizon, inflation stands at 2%. The new forecast puts average annual inflation at 3% for 2022, 2.4% for 2023, and 1.7% for 2024. After that, it is lower due to the now tighter monetary policy.

What were some of the challenges for the SNB’s return to positive policy interest rates?

M. Maechler: We have a powerful mandate: All you need to do is to announce something and it happens. Seriously: a lot of work had to be performed in the background. In particular, we had to adjust the framework of how we implement monetary policy. Altogether, it took us about five business days to get the money market rates to where we wanted them.

T. Moser: In contrast to the financial crisis of 2008/9, the banks have now a lot of excess liquidity. This is why we had to apply a couple of adjustments to the way we implement our policy. But the goal of our approach to implementing monetary policy is unchanged: To keep the main Swiss franc secured money market rate – Swiss Average Rate Overnight (SARON) – close to our policy rate. To achieve this, we now have two new elements in our approach to implementing policy: 1) reserve tiering and 2) reserve absorption.

Luncheon: The policy rate raise of the Swiss National Bank

SCCIJ October Luncheon speaker Mr. Thomas Moser.

Could you explain these technical matters in simple terms, please?

T. Moser: Commercial banks have an account with the Swiss National Bank. Each institution gets a threshold. Balances up to that threshold are remunerated at the now-positive policy rate of 0.5% rate, while banks’ reserves above the thresholds receive no interest. This creates a corridor for money market interest rates as well as, importantly, an incentive for banks to engage in mutually beneficial money market trades.

M. Maechler: The threshold system for reserve remuneration has actually been in place for several years. But, as you know, the SNB policy rate was until recently in negative territory. This meant that until recently the objective of monetary policy was to steer money market rates toward the lower end of the rate corridor. For that, the SNB had to arrange for the banking system to be supplied with ample liquidity.
Now that the policy rate is back in positive territory, we have to absorb, or mop up, enough liquidity in the banking system to raise the money market rate toward the upper end of the corridor. For this, we created the “SNB bill” as a new debt instrument, with durations of 1, 3, 6, and 12 months. The SNB bills are auctioned weekly. Market participants can choose to use some of their reserve balances to buy these bills.

But why would banks want to buy these SNB bills?

M. Maechler: Well, either they leave the money in their SNB bank account and earn nothing on it, or they buy the bills and receive an interest rate that’s determined in the auctions. Of course, the conditions we set in the auctions have to make sense. Incidentally, all the bills we issue are treated as reserves for regulatory purposes, such as satisfying minimum liquidity holdings.

T. Moser: In the past, there was the Libor rate, an unsecured interbank rate. But it was not a pure market rate, and unfortunately there was room for market manipulation, which ultimately contributed to the collapse of the Libor system. Our challenge was to help create a robust new money market, for collateralized claims. This was fully accomplished, in the Swiss franc case, by the end of last year. The upshot is that the tiered remuneration system allows us to steer short-term secured money market rates close to the now-positive policy rate, while still leaving enough space for interbank activity.

Luncheon: The policy rate raise of the Swiss National Bank

Members and advisors of the SCCIJ executive committee with October Luncheon speakers Ms. Maechler and Mr. Moser.

Aren’t you afraid of suppressing economic activity by hiking the interest rate?

M. Maechler: We had an average inflation rate of 0.7% over the past 30 years. Many of us have either never learned or have forgotten the lessons of what inflation can do to an economy. Even moderate rates of inflation can be poison for society. Low inflation is not just some number; it provides trust in the economy. Low and stable inflation allows firms to have more clarity on how they should fix prices and wages, when to invest, and what prices are going to be in the long term.

T. Moser: We do not know yet how much tightening is needed to bring inflation down. The situation is very complex with supply chains and labor markets still in an unsettled state. There is always a risk for policy makers that they do either too little and too much. Historical experience shows that doing too little is very costly in the long term.

Are you worried about consequences of the policy rate for the Swiss real estate market?

T. Moser: Prices for single-family houses and privately-owned apartments as well as volumes of mortgage lending have continued to rise in recent quarters. The very latest data do show signs of a slowdown in the residential investment property segment. The SNB will certainly continue to monitor developments in the mortgage and real estate markets closely. However, our mandate is price stability. The actors should absorb the risk. Right now, the financial sector is quite resilient.

Luncheon: The policy rate raise of the Swiss National Bank

An impression of the SCCIJ October Luncheon.

Biography of the speakers

Andréa M. Maechler, born in 1969, earned a Master’s in International Economics at Geneva’s IHEID and a Ph.D. in International Economics at the University of California, Santa Cruz. Her career took her to the OECD, the UNCTAD, the WTO, and the IMF. With effect from July 1, 2015, Dr. Maechler became a member of the SNB’s Governing Board – the first woman to occupy this position – as well as the head of the SNB’s III. Department.

Thomas Moser, born in 1967, concluded his university studies in 1997 with a Doctorate in Economics from the University of Zurich. Dr. Moser joined the SNB as a senior economist in the International Monetary Relations unit in 1999. Since September 2018, he has served as Dr. Maechler’s deputy of the SNB’s III. Department.

Text and photos: Martin Fritz for SCCIJ

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