Switzerland[CHF]

Institutional framework

Article 99 of the Federal Constitution entrusts the Swiss National Bank (SNB), as an independent central bank, with the conduct of monetary policy in the interests of the country as a whole. The mandate is explained in detail in the National Bank Act (art. 5 para. 1), which requires the SNB to ensure price stability and, in so doing, to take due account of economic developments.

The SNB's monetary policy strategy sets out how the SNB implements its monetary policy mandate. It consists of three elements: a definition of price stability, a medium-term inflation forecast, and the SNB policy rate.

The SNB implements its monetary policy by steering the interest rate level on the money market. In so doing, it seeks to keep the secured short-term money market rates close to the SNB policy rate. In this regard, the SNB focuses on SARON (Swiss Average Rate Overnight) - a secured, overnight market rate, which is the most representative of the short-term Swiss franc rates.

The SNB can influence money market rates by means of its open market operations or adjust the interest rate on sight deposits held by banks and other financial market participants at the SNB. In order to influence monetary conditions, the SNB can also intervene in the foreign exchange market.

Key features of the monetary policy implementation framework

The SNB distinguishes between open market operations and standing facilities. In the case of the former, the SNB takes the initiative in the transaction, whereas the initiative comes from the eligible counterparties in the case of standing facilities.

Open market operations include repo transactions, the issuance of SNB Bills, as well as the purchase and sale of SNB Bills in the secondary market. The SNB can carry out open market operations in the form of auctions or bilateral transactions. The auctions are conducted either by volume tender or by variable rate tender.

Standing facilities include the liquidity-shortage financing facility and the intraday facility. As far as the standing facilities are concerned, the SNB merely sets the conditions at which counterparties can obtain liquidity.

In principle, all banks domiciled in Switzerland and the Principality of Liechtenstein are admissible as counterparties in monetary policy operations. Other domestic financial market participants such as insurance companies, as well as banks headquartered abroad, may be admitted, provided there is a monetary policy interest in doing so and they contribute to liquidity on the secured Swiss franc money market.

In order to fulfil its monetary policy mandate, the SNB can also purchase and sell foreign currency against Swiss francs on the financial markets. Most foreign exchange transactions conducted by the SNB are either spot or swap transactions. The SNB concludes foreign exchange transactions with a wide range of domestic and foreign counterparties.

A further monetary policy instrument is the interest rate on sight deposit accounts. The National Bank Act authorises the SNB to keep interest-bearing and non-interest-bearing accounts for banks and other financial market participants. Until January 2015, the sight deposit accounts were non-interest-bearing. Since 22 January 2015, the SNB has charged a negative interest rate on sight deposits held by banks and other financial market participants at the SNB. However, exemption thresholds apply. By setting the interest rate on sight deposits and defining other conditions, the SNB influences the interest rate level on the money market.

The duty to hold minimum reserves ensures that banks have a minimum demand for base money. Eligible assets in Swiss francs comprise coins in circulation, banknotes and sight deposits held at the SNB. The minimum reserve requirement currently amounts to 2.5% of the relevant liabilities, which are calculated as the sum of short-term liabilities in Swiss francs (up to 90 days) plus 20% of liabilities towards customers in the form of savings and investments. Since monetary policy in recent years has provided the banking system with ample liquidity, banks' reserves are currently at a level that exceeds the statutory minimum reserve requirement several times over. The SNB requires that the banks and other financial market participants with which it conducts lending transactions provide sufficient collateral. In so doing, the SNB protects itself against losses and ensures equal treatment of its counterparties. Since the SNB also admits banks headquartered abroad to its monetary policy operations and since the stocks of Swiss franc securities are limited, it also accepts securities in foreign currencies. The SNB sets high minimum requirements with regard to the marketability and credit rating of securities.

More detailed information can be found in the Guidelines of the Swiss National Bank on Monetary Policy Instruments and in the five related Instruction Sheets (available on the SNB website).

Unconventional monetary policy measures

The most important unconventional measures taken by the SNB in recent years have been interventions in the foreign exchange market, the temporary setting of a minimum exchange rate against the euro (September 2011 until January 2015), and the introduction of a negative interest rate on sight deposits held by banks and other financial market participants at the SNB.