This intervention served to shore up savers’ confidence in the viability of the financial sector. Our enhanced credit support measures were taken to preserve the integrity of the transmission mechanism of monetary policy at a time when banks showed a tendency to withdraw in a disorderly way from their intermediation function. A functioning transmission mechanism is the pre-condition for the central bank to be able to accomplish its mandate of maintaining price stability in the medium term. The same policy intention underlies our Securities Markets Programme, which we started on 10 May this year. We intervene in euro area public and private debt securities markets in order to ensure depth and liquidity in those market segments which have proved dysfunctional. As government securities are the basis for pricing all private debt instruments, our action in the sovereign bond markets aims to create the orderly conditions necessary for lenders to provide a steady flow of credit to the private economy. Overall, through its enhanced credit support measures, the ECB has replaced ill-functioning segments of the financial market and acted as an “intermediary” between banks with a liquidity deficit and banks with a liquidity surplus. At the same time, and with a slightly longerterm perspective, the measures have contributed to a more stable situation in various segments of the financial markets during the crisis. For example, easier access to central  BIS Review 83/2010  3  bank refinancing meant that banks could refinance their money market activities more easily if needed.
The SNB therefore monitors the situation on these two markets continuously. An environment of low interest rates also brings fundamental monetary policy challenges. One of these arises from the fact that it is possible to hold money in the form of cash. I have shown that the SNB’s negative interest rate is an effective monetary policy tool. But how far can nominal interest rates actually fall? If the interest rate level declines further, at some point cash will become more attractive than sight deposits bearing negative interest. As the SNB has no intention of doing away with cash, this results in an effective lower bound for interest rates, which limits the scope for monetary policy action. This lower bound is below zero, because holding cash is expensive and risky. Thus, people are prepared to pay a certain amount to hold their money electronically. In Switzerland, the cost associated with the current  Page 7/16  negative interest rate is clearly lower than the cost of holding cash. Consequently, demand for cash has not yet risen substantially. So the effective lower bound for interest rates has not yet been reached, but we know that it exists. Another monetary policy challenge is the fact that the expansionary effects of low interest rates on consumption and investment can fade over time. As I have noted, following the introduction of negative interest, some banks increased their lending rates in order to offset falling interest margins.