The introduction of the SNB policy rate in June 2019 marked the end of the SNB’s use of Libor in its monetary policy strategy. With this change, the SNB also eliminated Libor as its communication instrument. The change sent a clear signal to the financial markets that the end of the Libor era is inevitable. In addition, the switch ensured that our conditional inflation forecast for the next three years, a core element of our monetary policy strategy, will continue to be based on an existing and economically meaningful interest rate over the entire forecast horizon. To be sure, the significance of the money market extends far beyond its use in the transmission of monetary policy. The money market also plays a vital role in the economy’s credit transmission process. If money markets do not function properly, the credit extension process across the entire financial system will deteriorate, with serious consequences for the real economy. In times of financial system stress, ensuring that the money markets continue to function well becomes even more consequential, because efficient liquidity redistribution between banks and unencumbered lending are especially important for the economy in such circumstances. During the Global Financial Crisis from 2007 to 2009, the money markets were regularly compared with the bloodstream of a living organism, delivering oxygen to the body’s vital organs. The coronavirus crisis has certainly confirmed the fundamental importance of having well-functioning money markets. Finally, money market interest rates serve as reference rates for the whole economy.
More importantly, though, the money market continues to play a crucial role in the implementation of the SNB’s monetary policy, even though much has changed in the Swiss franc money market and in the SNB’s implementation of monetary policy in recent years. For instance, we now use the SNB policy rate rather than the Libor target range to communicate the desired level of money market interest rates. And the most representative money market rate in Swiss francs is no longer the unsecured three-month Libor, but the secured SARON (Swiss Average Rate Overnight). Moreover, since 2015, the negative interest rate on the sight deposits that banks and other financial market participants hold at the SNB has been our main instrument for steering short-term interest rates. These are some of the reasons why we are focusing on the money market today. First, we will explore the significance of the money market for the economy and the SNB. We will ask why the market is so important, and we will examine the roles played by three particular interest rates. They are the SNB policy rate, which is a communication tool; the negative interest rate on sight deposits held by banks at the SNB, which is an instrument for implementing monetary policy; and SARON, the rate for overnight funds on the secured interbank money market. We will then reflect on the current environment. How does the money market work in an environment of negative interest rates? How does the SNB steer money market rates in negative territory?