And what are the key challenges the SNB faces when implementing its monetary policy? Let us start by discussing why a well-functioning money market is so important. A wellfunctioning money market is essential for the transmission of monetary policy. Like most central banks, the SNB steers interest rates on the money market. To this end, it sets the SNB policy rate and uses its monetary policy instruments to keep secured short-term Swiss franc money market rates close to the policy rate. It would not be possible to steer money market rates in this way without a well-functioning money market. Since June 2019, the SNB has communicated its interest rate decision via the SNB policy rate. The SNB policy rate signals the level of interest rates the SNB seeks to maintain on the secured money market. When assessing the prevailing conditions in the money market, the SNB nowadays focuses on SARON. In the past, the SNB used to set a target range for the three-month Libor in its monetary policy assessment, and it then sought to keep this interest rate in the middle of the target range through money market operations, such as repo  Page 3/13  transactions. In Chart 1, the old system with a target range for the three-month Swiss franc Libor is shown on the left, and the new system with the SNB policy rate is shown on the right.
impose a negative interest rate on banks’ sight deposits held at the SNB if the deposits exceeded a certain exemption threshold. On 15 January 2015, the SNB discontinued the minimum exchange rate relative to the euro and simultaneously lowered the negative interest rate due to take effect on 22 January to −0.75%. Page 6/13  The role of the interest rate on banks’ sight deposits at the SNB In the years leading up to the Global Financial Crisis a so-called structural liquidity deficit prevailed in the banking systems of many countries, including Switzerland. Since the SNB did not pay interest on banks’ sight deposits at the SNB, banks held as little excess liquidity as possible in the form of sight deposits in an environment of positive interest rates. During this period, the SNB steered money market interest rates via the price and quantity of its daily money market operations, which were conducted in the secured segment of the money market in the form of repo transactions. For instance, if the SNB wished to induce a decline in money market rates, it provided more liquidity and reduced its repo rate. This setup changed with the Global Financial Crisis. Many central banks initially responded to the unfolding crisis by lowering policy rates. Subsequently, they launched asset purchase programmes (‘quantitative easing’) or – as was the case with the SNB – conducted foreign exchange market interventions.