In some quarters, central banks are even judged to have a decisive influence on financial market prices. Insofar as it allows monetary policy objectives to be met, this is of course, from a central bank perspective, not unwelcome. Ultimately, the aim of all monetary policy measures is to ensure the effective transmission of monetary policy stimuli to the economy. This applies especially in exceptional times such as those we have experienced in recent years, marked by modest and fragile economic and price developments worldwide. 8  Significance for the implementation of monetary policy With the deployment of unconventional measures, implementation of monetary policy has become considerably more challenging. 9 This also applies to the SNB. First and foremost, we needed to gain a deeper understanding of the markets and refine our analytical tools. We have put a great deal of effort into these areas over recent years, as I will now illustrate with a few examples. Challenges in implementing negative interest  Turning to the implementation of negative interest first. As you know, at the beginning of 2015, the SNB started charging interest of –0.75% on sight deposits held by banks and other financial market participants at the SNB. There are a number of challenges in implementing negative interest rates, three of which I will briefly outline here. First, the potential for interest rate reductions further into negative territory is limited by the effective lower bound. This is determined, among other things, by the cost of holding cash.

Interest rates are too blunt an instrument for that, and attempts to use interest rates for financial stability purposes would cause considerable collateral damage to inflation and the real economy. Instead, the best instruments to achieve financial stability are supervision and regulation, including appropriate bank resolution regimes. In many countries, the responsibility for these instruments rests on other authorities than the central bank. Generally, to the extent financial instability depends on specific distortions, good regulation should aim to attack these distortions as close to the source as possible. To counter the observed procyclicality of existing regulation, macro-prudential regulation that is contingent on the business cycle and financial indicators may need to be introduced to induce better financial stability. Possible macro-prudential regulation includes variable capital, margin, and equity/loan requirements. As expressed by Bean (2009), “the best approach is likely to involve a portfolio of instruments”. What are the specific conclusions for flexible inflation targeting? One old conclusion is that consideration of the impact of financial factors on the forecast of inflation and resource utilization may require longer forecast horizons. Several inflation-targeting central banks (including the Bank of England, Norges Bank and the Riksbank) have for other reasons already extended their forecast horizon from the previously common two years to three years. There is nothing that in principle prevents an inflation targeter from considering forecasts beyond a three-year horizon, but in practice there is usually little information about anything at longer horizons except the tendency to revert to the long-term average.