By lowering the interest rate on sight deposits into negative territory, the SNB restored the traditional interest rate differential to more normal levels, as illustrated by the orange area in the chart. The SNB’s willingness to intervene in foreign exchange markets A higher interest rate differential reduces the relative attractiveness of the Swiss franc. However, financial markets may be exposed to a sudden increase in volatility, which could lead to a sharp rise in the demand for Swiss francs. This is where our willingness to intervene in the foreign exchange market plays a crucial role in stabilising the markets. For example, this summer, when the Greek government announced a referendum on the international bailout programme, we intervened in the forex market at a time of great market volatility and global uncertainty. This willingness to intervene in the forex market as required is a key pillar of our monetary policy. The size of the SNB’s balance sheet reflects our monetary policy measures. One consequence of a larger balance sheet is larger fluctuations in the financial results. In the first three quarters of this year, the SNB incurred a provisional loss of CHF 34 billion, predominantly reflecting valuation effects following the discontinuation of the minimum exchange rate. This is shown in chart 2. It is still too early to draw conclusions for the 2015 year-end result, particularly in the current volatile international environment. Let me be clear, however: It is not the purpose of the SNB to generate and distribute profits.

Since mid-January this year, the SNB’s monetary policy has been based on two complementary pillars: The negative interest rate and our willingness to intervene on the foreign exchange market as required. These instruments are proving effective at countering excessive pressure on the exchange rate, thereby ensuring price stability in the medium term. However, I would like to stress that, at current levels, the Swiss franc remains significantly overvalued. With an interest rate of –0.75% on sight deposits, we have gone far compared to most other countries. We have observed that money and capital markets are functioning smoothly under the negative interest rate. However, mortgage rates have not fallen to the same extent as interest rates on money and capital markets. Hence, fears that the negative interest rate  3  Jordan, T. (2015) “The impact of international spillovers on inflation dynamics and independent monetary policy: the Swiss experience”, conference paper prepared for the 39th Economic Symposium on ‘Inflation Dynamics and Monetary Policy’ in Jackson Hole, 28 August 2015. BIS central bankers’ speeches  5  could contribute to imbalances on the mortgage and real estate markets have so far proved unfounded. Finally, economic conditions remain challenging in Switzerland. The SNB monitors the situation continuously, and our latest analysis and forecast will be published at the next monetary policy assessment on 10 December. In general, we believe that the economy has returned to a moderate path of recovery, although significant downside risks remain. These originate, in particular, from the fragile international environment and exchange rate developments.