Page 8/8  Financial markets and monetary policy implementation – an evolving relationship Andréa M. Maechler Member of the Governing Board of the Swiss National Bank Money Market Event Geneva, 17 November 2016  Pre-crisis monetary policy focused on steering a short-term interest rate Conventional interest rate policy Banks  Capital market Reference rate  Monetary policy 1  Money market  Foreign exchange market  Demand  Inflation  Other financial markets  Financial markets  Economy  17.11.2016 Financial markets and monetary policy implementation – an evolving relationship | Andréa M. Maechler | © SNB  Forward guidance and negative interest aimed at strengthening monetary policy transmission Unconventional interest rate policy Banks  Forward guidance Negative interest  Monetary policy 2  Capital market Money market  Foreign exchange market  Demand  Inflation  Other financial markets  Financial markets  Economy  17.11.2016 Financial markets and monetary policy implementation – an evolving relationship | Andréa M. Maechler | © SNB  Quantitative easing and foreign currency purchases directly influence various financial market prices Balance sheet-related measures Banks  Capital market  QE Foreign exchange purchases  Foreign exchange market Money market  Monetary policy 3  Demand  Inflation  Other financial markets  Financial markets  Economy  17.11.2016 Financial markets and monetary policy implementation – an evolving relationship | Andréa M. Maechler | © SNB  (APP)  (LSAP1)  (LSAP2)  (MEP)  (APF)  (QQE)  APP = Asset Purchase Programme, LSAP = Large Scale Asset Purchases, MEP = Maturity Extension Programme, APF = Asset Purchase Facility, QQE = Quantitative and Qualitative Easing 4  17.11.2016 Financial markets and monetary policy implementation – an evolving relationship | Andréa M. Maechler | © SNB  Sources: Andrade et al.

This measure was called ‘yield curve control’. For a comprehensive appraisal of unconventional monetary policy measures, cf. Borio, C. and A. Zabai (2016), Unconventional monetary policies: a re-appraisal, BIS Working Papers, 570, pp. 2–9. The SNB publishes a conditional inflation forecast that can also influence financial market participants’ interest rate expectations and therefore can also be regarded as a form of forward guidance. Filardo, A. and B. Hofmann (2014), Forward guidance at the zero lower bound, BIS Quarterly Review, March 2014. Page 3/8  Using negative interest rates, the central banks have, to some extent, reactivated the interest rate instrument, by taking certain reference rates below zero. Since negative interest rates reinforce the expansionary impact of quantitative easing measures, some central banks introduced both measures in combination. Currently, several central banks are using negative interest rates, including the euro area, Japan and Switzerland – although at different conditions and with different features. The SNB’s negative interest rate is primarily aimed at maintaining the traditional interest rate differential to the rest of the world, in order to make Swiss franc investments less attractive. The interest burden increases as soon as the SNB supplies the banking system with additional liquidity, especially through further foreign exchange market interventions. The negative interest rate and the SNB’s willingness to remain active in the foreign exchange market are thus two mutually reinforcing measures, which are having the desired effect. Nonetheless, the Swiss franc remains significantly overvalued.