In order to steer SARON close to the upper bound of the interest rate corridor and thereby towards the SNB policy rate, we perform reserve-absorbing operations that reduce the stock of excess reserves and ultimately lower the supply of reserves in the interbank market. As shown on Slide 10, if the scale of the reserve-absorbing operations is large enough, the new money market equilibrium will be characterised both by a lower supply of reserves and, as desired, by SARON being close to the SNB policy rate. The interest rate in the auctions for our term repos and SNB Bills is near the policy rate on an overnight-equivalent basis. These operations establish a ‘soft floor’ on the interest rates used in transactions in the overnight repo market. This is depicted by the green line on the slide just below SARON, which is indicated by the red dot. It is a ‘soft’ floor because, among other factors, these operations settle with a delay of two business days and thus do not, by themselves, fully control the overnight money market rate. If needed, we can also conduct overnight repo transactions – also referred to as ‘fine-tuning operations’. These establish a ‘hard floor’ for the interest rates used in transactions in the overnight segment, shown as the dark blue line on the slide.
| Andréa M. Maechler and Thomas Moser | © Swiss National Bank  Reserve absorption also reduces stock of reserves above threshold  Banks with reserves exceeding their thresholds Threshold Reserves lent to other banks  Reserves up to threshold  Remunerated at policy rate (0.5%)  Reserves absorbed via term repos & SNB Bills (≈ 0.5%)  Banks with reserves falling short of their thresholds Threshold  Interbank trade  Reserves borrowed Remunerated at policy rate (0.5%) from other banks Reserves  8  17.11.2022 Return to positive interest rates: Why reserve tiering? | Andréa M. Maechler and Thomas Moser | © Swiss National Bank  Reserve tiering creates an interest rate corridor for SARON Supply of reserves before OMOs  %  Upper remuneration rate = SNB policy rate (0.5%)  Demand for reserves  SARON (≈ 0%)  Lower remuneration rate (0%) Reserves  9  17.11.2022 Return to positive interest rates: Why reserve tiering? | Andréa M. Maechler and Thomas Moser | © Swiss National Bank  Reserve absorption via OMOs steers SARON close to policy rate  %  Supply of reserves after OMOs  Supply of reserves before OMOs  Upper remuneration rate = SNB policy rate (0.5%) SNB term repos and SNB Bills (‘soft floor’) SNB overnight repos (‘hard floor’)  SARON (≈ 0.45%)  Effect of OMOs  SARON (≈ 0%)  Lower remuneration rate (0%) Reserves  10  17.11.2022 Return to positive interest rates: Why reserve tiering?