gfc the stock of reserves has grown tremendously. 5 as a result, the money market is today characterised by a structural reserve surplus instead of a structural reserve deficit. a return to the status quo before the gfc would have required us to reduce the stock of reserves on a very large scale. 6 given the substantial quantities involved and the long time it would have taken to complete this task, we doubt that we would have been able to steer money market rates in the short term. second, the landscape of swiss franc reference rates has changed significantly. in particular, libor was replaced by saron as the new reference rate in swiss francs. 7 saron – an acronym for swiss average rate overnight – is calculated based on actual transactions by the private sector in the overnight segment of the swiss franc repo market. a sufficient volume of interbank money market activity is therefore required to ensure a robust basis for calculating saron. why does the snb apply reserve tiering? let me now explain in more detail how our approach works and, in particular, why both elements of the approach are required in order to implement our monetary policy in a positive rate environment. we begin with the first new element in our implementation approach, which is reserve tiering. as i will show, remunerating reserves lets us steer money market rates in an environment with a positive policy rate and a large stock of reserves. 8 however importantly, and in contrast to many other central banks that also pay interest on reserves, the snb does not apply the same interest rate to all reserves. instead, we employ reserve tiering. to illustrate how reserve tiering works, let us consider a highly stylised banking system, depicted on slide 6. the snb grants each bank that holds reserves a so - called ‘ threshold ’. this is marked on the slide by a red vertical bar. each bank ’ s individual threshold is a function of its minimum berentsen et al. ( 2018 ) examine various approaches to implementing monetary policy based on the assumption of a large stock of reserves. uncertainty about both the level and variability of the structural demand for reserves has also increased during this period. this uncertainty is partly due to new liquidity regulations that came into effect in the wake of the gfc. the stock of reserves could be reduced by selling some of the foreign currency acquired in previous years and by absorbing reserves via open market operations. in both cases, negative effects, such as a substantial appreciation of the swiss

expect exports to grow markedly in line with the international economic upswing in the second half of 2003. equipment investment should follow with a slight time lag. until the middle of next year, however, the swiss economy is likely to grow only very moderately. until then, unemployment could therefore continue to rise. private consumption, which has long been the mainstay of economic activity, will pick up only slowly next year. real economic activity should increase by just over 1 % in 2003, while for this year we expect zero growth. inflation forecast i shall now turn to the course of inflation and our new inflation forecast. our inflation forecast of june 2002 ( the green dash - dotted curve in the graph ) shows that at that time we assumed, based on a stable three - month libor rate of 1. 25 %, that inflation would gradually rise to 1. 9 % in the first quarter 2005. year - on - year inflation, as measured by the national consumer price index, dropped to 0. 3 % in the third quarter 2002 from 0. 7 % in the second quarter. in october and november it rose to approximately 1 %. these fluctuations are due mainly to changes in the exact points in time when data on clearance sales prices are collected. this is also the main reason why our forecast of june 2002 over - estimated the development of inflation in the third quarter 2002. our new inflation forecast ( red dashed curve ) is based on the assumption that growth in the us will pick up again from the second quarter 2003 onward. the us economy is likely to achieve its growth potential stepwise until the beginning of 2004. in the eu, the upswing will take a little longer. we are not expecting a significant acceleration of growth before the end of 2003. we assume that the dollar / euro rate will remain at about the current level and that the oil price will be around $ 25 per barrel. on the assumption that the three - month libor rate will remain stable at 0. 75 % during the next three years, inflation should average 0. 7 % in 2003, move up to 0. 9 % in 2004 and reach 1. 6 % in 2005. forecast inflation will remain below 1 % until the end of 2004 except in the fourth quarter of 2002. in the course of 2005, however, a marked acceleration will set in, with forecast inflation reaching the 2 % mark in the fourth quarter of 2005. the new forecast is consistently below that of june 2002. it reflects the delay in the economic