SNB hikes rates 75bps and adjusts monetary policy in money and repo markets

The Swiss National Bank (SNB) hiked interest rates 75 basis points, bringing a period of a negative SNB policy rate to an end. To ensure that the secured short-term Swiss franc money market rates remain close to the SNB policy rate in a positive interest rate environment, the SNB is adjusting its implementation approach.

The approach now consists of the following two elements. The first is a tiered remuneration of the sight deposits that banks and other financial market participants hold at the SNB, which remunerates sight deposits up to an individual threshold at the SNB policy rate. Sight deposits above this threshold are remunerated at an interest rate of 0%. The individual thresholds are based on the calculation of exemption thresholds in a negative interest rate environment used to date.

The tiered remuneration of sight deposits creates an incentive for account holders to carry out money market transactions with each other even in a situation of liquidity surplus. These transactions contribute to a robust basis for the calculation of SARON (Swiss Average Rate Overnight).

The second element is the absorption of liquidity by way of open market operations. With these operations, the SNB reduces the sight deposits and thereby the liquidity supply in the money market. In this way, it ensures that SARON and the other secured short-term money market rates remain close to the now positive SNB policy rate. To absorb liquidity by way of open market operations, the central bank will use two proven monetary policy instruments: SNB Bills and repo transactions.

Participants in the Swiss franc money market are familiar with both instruments. They have used repo transactions regularly in previous years. SNB Bills are debt certificates issued by the SNB, typically with a term of up to one year. It last used SNB Bills for the implementation of monetary policy in 2011 and have since conducted tests to ensure operational readiness. SNB expects the volume of SNB Bills issued to increase within a short period of time on the back of the weekly auctions.


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