First, there is the question of whether, in stabilising the money market, the SNB released a flood of liquidity, thereby entering into inflation risks. The SNB did indeed sometimes inject large amounts of central bank money into the market. Since the onset of the turmoil, we have in principle always provided a generous supply of liquidity through repo operations. However, fine-tuning was also consistently used to absorb any excess liquidity, as soon as call money rates fell below a certain level. Since the banks ultimately only have limited end-of-day demand for central bank money, there was a regular flow of funds back to the SNB. These operations allowed us to do two things: first, to limit the volatility of call money rates; and, second, to keep market rates close to our repo rate. This is shown in chart 2. Moreover, this also enabled us to keep the average level of sight deposits stable, which meant that we did not allow the banking system to be supplied with excess liquidity. As can be seen from chart 3, there was a wide day-to-day fluctuation in sight deposits during the crisis but, on average over the month, levels remained more or less stable. Thus Switzerland cannot be said to have been flooded with liquidity. Second, attention has focused on how the interest rates are fixed for monetary policy repo auctions. The SNB, on the basis of its monetary policy assessment, decides on a range for the three-month Libor which it considers appropriate for monetary policy purposes.
Yet the most notable thing is that, despite these difficulties, we have succeeded in keeping the Libor around the middle of the target band. This is, after all, what counts for the implementation of monetary policy. So neither the current criticisms levelled at the Libor nor the actual movements in the Libor are an immediate reason to dispense with this rate as the operational target of the SNB. Conclusion Let me briefly conclude. Despite clear signs of a return to calm, the money market has not yet gone back to “business as usual”. The Libor/TOIS differentials continue to indicate a certain degree of tension. The various waves of turbulence also show how difficult it is to predict what will happen next. Central bank actions have helped to defuse the situation. Nevertheless, they can only treat the symptoms of the malaise, or fever. An effective cure and the restoration of confidence between market participants are primarily a matter for the banks themselves. The SNB’s tools – its medicine cabinet – have so far proved their worth during the turbulence. Yet the crisis provides a reason to review and where necessary adapt them. For central banks, it is important to consider, not just the immediate effect of an instrument, but also the longer-term repercussions. Thanks to their monopoly in issuing currency, central banks can engage in almost unlimited short-term intervention when markets and market participants are threatened with collapse. However, such extreme measures carry high risks for the longer term.