Page 13/13  Monetary policy implementation: How to steer interest rates in negative territory Andréa M. Maechler, Member of the Governing Board Thomas Moser, Alternate Member of the Governing Board Swiss National Bank Virtual Money Market Event, 5 November 2020  Chart 1  SNB policy rate and target range for three-month Swiss franc Libor New system: SNB policy rate  %  %  3M CHF Libor  Target range for 3M CHF Libor  SARON  time 05.11.2020 Monetary policy implementation: How to steer interest rates in negative territory | Andréa M. Maechler and Thomas Moser | © Swiss National Bank  SNB policy rate  time  Source: SNB  Old system: Target range for 3M CHF Libor  Chart 2  Sources: SNB, IMF, OECD  Long-term yields have fallen globally over the past three decades  05.11.2020 Monetary policy implementation: How to steer interest rates in negative territory | Andréa M. Maechler and Thomas Moser | © Swiss National Bank  Chart 3  Interest rate on banks’ sight deposits held at SNB is a key instrument  Sources: SNB, Bloomberg  SWISS FRANC MONEY MARKET RATES  05.11.2020 Monetary policy implementation: How to steer interest rates in negative territory | Andréa M. Maechler and Thomas Moser | © Swiss National Bank  Chart 4  SNB’s fine-tuning operations and one-month auctions guide SARON  % -0.55  CHF billion 18.0  -0.60  13.5  -0.65  9.0  -0.70  4.5  -0.75 Oct-19  0.0  Jan-20 Interbank volume (rhs)  Apr-20 SARON  Jul-20 Fine-tuning interest rate  05.11.2020 Monetary policy implementation: How to steer interest rates in negative territory | Andréa M. Maechler and Thomas Moser | © Swiss National Bank  Oct-20 1M auction rate  Sources: SNB, Bloomberg  OVERNIGHT REPO VOLUME, SARON AND SNB’S FINE-TUNING AND AUCTION RATES

I should perhaps mention here for the sake of completeness that, put simply, real interest rates are nominal interest rates less inflation. 1 Chart 2 shows longterm real interest rates in Switzerland, Germany and the US, calculated as the difference between the nominal yield on 10-year government bonds and the observed inflation rate. I should emphasise two points: First, while real interest rates in Switzerland are currently negative, a historical comparison shows that this is by no means a new phenomenon. For example, real interest rates in Switzerland were also negative in the 1990s. Second, real interest rates have fallen on a global basis over the last 20 years. I shall now turn to an economic concept that plays a key role in the current monetary policy debate, namely the equilibrium real interest rate. The equilibrium real interest rate is not directly observable and is determined by fundamentals such as time preferences and the age structure of a society, which define the supply of savings and the demand for investment. The SNB controls a short-term nominal interest rate. By contrast, it has only an indirect and temporary influence on long-term real interest rates, which drive investment decisions. Longterm real interest rates are primarily determined by saving and investment decisions and hence by market forces. If the central bank wishes to stimulate the economy and increase inflation, it cuts the policy rate. Since inflation does not react immediately, real interest rates temporarily fall below the equilibrium rate.