For this reason, it is not always easy to determine when, and how strongly, it will influence the Swiss franc exchange rate. However, if all other factors remain the same, there is less demand for investments in Switzerland – and thus for Swiss francs – when Swiss interest rates decline. BIS central bankers’ speeches  3  But I am also aware that negative interest rates do not constitute business as usual. In addition to the interest rate differential, nominal interest rates will themselves also return to normal. For this to happen, economic conditions abroad will need to improve to the point that interest rates in Switzerland can rise without causing the Swiss franc to strengthen further. This is currently not the case. At the most recent monetary policy assessment, we decided to leave the target range for the three-month Libor unchanged at between −1.25% and –0.25%. The interest rate on sight deposits at the SNB remains at –0.75%. Despite a slight depreciation, the franc is currently still significantly overvalued. We are convinced that negative interest rates and the SNB’s willingness to intervene as required in the foreign exchange market will make investments in Swiss francs less attractive; both of these factors serve to weaken the Swiss franc. The provisional inflation forecast in chart 4 is also based on a depreciation, along with a Libor rate of –0.75%. The chart shows that, over the short term, inflation will be lower than forecast in June, owing to the lower oil price.

In particular, it features a flexible and shock-dependent medium-term horizon, meaning that monetary policy does not  http://www.ecb.europa.eu/press/key/date/2017/html/sp170330.en.html[03.04.2017 15:53:14]  Central bank independence revisited  automatically respond to shocks, unless there is a risk of these shocks becoming embedded in inflation expectations. And it also features a monetary pillar. Under this pillar, trends in credit markets are monitored, and factored into policy decisions, even when inflation has not moved. [57] As a built-in feature, this ensures a certain leaning-againstthe-wind attitude in policymaking. However, although the ECB’s two-pillar monetary policy strategy incorporates financial stability considerations, macroprudential policy cannot seek to impose its needs on the monetary pillar. Against this background, one may wonder why microprudential supervision was not considered sufficient to address financial stability issues. One reason is that microprudential supervision is aimed at ensuring the soundness of individual financial institutions by mitigating their vulnerability to idiosyncratic risks. However, setting up a regulatory framework which guarantees the soundness of individual banks does not automatically ensure the soundness of the financial system as a whole. Financial institutions’ inter-connectedness contributes to generating systemic risk, even when such institutions, taken in isolation, seem sound. Moreover, since financial institutions tend to engage in similar investment strategies both in upturns and downturns of the financial cycle, over time common exposures to similar sets of risks can create financial imbalances or credit disruptions, leading to pro-cyclicality. When a shock surfaces, interconnections may contribute to amplifying expansionary and contractionary phases of the financial cycle.