Before delving into the mechanics, let me touch upon why Swiss franc money market interest rates are in negative territory in the first place. The role of the global low interest rate environment For almost six years now, money market rates in Switzerland have been negative, largely due to the international economic environment. Interest rates on investments denominated in Swiss francs are usually lower than those on investments denominated in other currencies. As a result, Switzerland has traditionally experienced a negative ‘interest rate differential’ versus other currencies. On the one hand, this is due to the fact that inflation in Switzerland has generally been lower than in other countries. On the other, both domestic and foreign investors regard Swiss-franc denominated investments as particularly safe, reflecting the franc’s traditional status as a safe haven in times of heightened international uncertainty. Over longer time periods, investors have therefore been willing to accept a lower return on investments denominated in Swiss francs. Over the past three decades, interest rate levels have fallen markedly around the world. Chart 2 shows that the yields on 10-year government bonds issued by advanced economies – illustrated here by Switzerland (in red), Germany (in blue), the UK (in orange) and the US (in green) – have been on a downward trajectory since the early 1990s. Nominal interest rates have fallen in part because many central banks successfully managed to tackle the high rates of inflation that prevailed during the 1970s and 1980s.

The coronavirus crisis generated significant turbulence in financial markets when it surfaced in February and March. The leading central banks eased their monetary policy stance, and many made use of the standing US dollar swap lines to enhance the provision of global US dollar liquidity. Investor sentiment improved substantially beginning in late March on the back of large-scale fiscal and monetary support programmes launched in many countries, including Switzerland. Bolstered by these programmes and the eventual relaxation of public health policy restrictions, financial markets continued their recovery until late summer, and economic activity also picked up considerably. However, developments in recent days and weeks have made it clear that the coronavirus crisis is not over and that uncertainty remains high. In Switzerland, the SNB has repeatedly reaffirmed its expansionary monetary policy. In so doing, it has made an important contribution in terms of immediate crisis management. Some of the instruments the SNB has marshalled to manage the coronavirus crisis are well known. The negative interest rate on banks’ sight deposits held at the SNB and our willingness to intervene more strongly in the foreign exchange market help counter upward pressure on the Swiss franc. Taken together, these measures have helped shield Switzerland’s economy from additional strains that might otherwise have been exerted by foreign exchange markets, including further downward pressure on inflation. Other instruments are new or have had to be reactivated. One of the new instruments is the SNB’s COVID-19 refinancing facility (CRF).