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.

No doubt the drama of policy uncertainty will continue. But what will be the end-game? Broadly speaking, we envision two scenarios: an extreme scenario and a baseline scenario. In the extreme scenario, prolonged political gridlock over policy leads to a liquidity seizure. Failure to ratify the fiscal compact results in handicapped liquidity support efforts on the part of the authorities and heightened market concerns. Rising risk premium leads to explosive debt dynamics, loss of market access and rollover difficulty, which in turn leads to even greater liquidity needs. With the cost of rescue mounting, internal country politics may further delay policy leading to a vicious cycle between rising rescue costs and policy inaction. There are signs that these risks are very real. For example, last month in late July, Spanish bond yields recently jumped up again over 7 percent, making the country’s debt dynamics unstable. There has also been upward pressure on Italian bonds. The ECB came to the rescue by promising to “do whatever it takes to preserve the euro as a stable currency”. Markets stabilized and yields came down. The US stock market also picked up. Nevertheless, the risk that yields could erupt again persists, especially if concrete progress in implementing policy does not take place. In the event of a liquidity seizure, there will be considerable spillover into global financial markets. Trade will decline amid the credit crunch that will surely follow. Asia, Thailand included, will not be spared the turmoil. So that’s the extreme scenario.