Second, I will assess how the negative interest rate as a policy instrument has been transmitted to different segments of the financial markets. Finally, I shall discuss the outlook for economic growth and inflation in Switzerland. Following my speech, my colleague Dewet Moser will take a closer look at the many operational aspects involved in the implementation of our monetary policy. Monetary policy environment: breaking new ground On 15 January, the SNB discontinued its minimum exchange rate of CHF 1.20 to the euro, and announced a further cut in the interest rate on sight deposits to –0.75%. These decisions were the response to international developments. Over the course of 2014, market participants began to expect that the US central bank, the Federal Reserve would start increasing its policy rates. Meanwhile, the ECB indicated that additional monetary stimulus would be required in the euro area. As a result, the euro weakened substantially against the US dollar. The euro/Swiss franc minimum exchange rate came under intense pressure, and by midJanuary 2015, it had become clear that it was no longer sustainable. Had the SNB not acted as it did in discontinuing the minimum exchange rate against the euro, it would have been forced to buy enormous amounts of foreign currency. The SNB’s balance sheet would have expanded rapidly, potentially to a size that would have severely impaired our ability to fulfil our constitutional mandate in the long term.
In the market for private sector bonds, interest rates fell as well, but not by as much as government bond yields, reflecting the greater substitution opportunities for corporate bond investors. While the introduction of the negative interest rate caused interest rates on the money and capital markets to decline, mortgage rates did not decrease to the same extent. Indeed, for long-term mortgages, interest rates are slightly higher than they were at the beginning of the year. This is because banks’ refinancing costs have not fallen to the same extent as money market interest rates. As a result, banks’ interest margins have come under pressure. 1 To partially offset this effect, banks have raised their mortgage interest rates. As yet, therefore, fears that the negative interest rate might contribute to stronger growth in mortgage lending have proved unfounded. 1  This affects the banks’ “liability margin”, which is the difference between the interest on maturity-matched alternative funding sources and the interest on deposits. BIS central bankers’ speeches  3  The Swiss economy in a difficult environment So far, I have spoken mainly about exchange rates and interest rates – that is, monetary conditions in the Swiss economy. I would now like to turn to the real economy. Switzerland is a relatively small open economy. 2 In general, this means that international developments matter a lot to Switzerland. However, during the global recession of 2009 and the sluggish recovery that followed, the Swiss economy proved to be surprisingly resilient.