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. however, it will return to positive territory in the medium term. negative interest and financial stability so the negative interest rate is currently essential to ensure appropriate monetary policy conditions for the swiss economy. but we also know that low interest rates, and in particular a prolonged period of low rates, pose a risk to financial stability. experience in many countries has shown that such conditions provide fertile ground for imbalances to develop in credit markets and asset prices. 2 indeed, under normal circumstances, lower money market interest rates lead via transmission channels to lower credit and mortgage rates. in switzerland, the focus is on the mortgage and real estate markets, as around 85 % of private domestic loans are in the mortgage segment. chart 5 shows that, despite negative money market rates, mortgage rates have not fallen ; they have even risen slightly. movements in mortgage market rates seem to have become decoupled from snb monetary policy. how can this development be explained? it is true that a lowering of interest rates into negative territory differs from a conventional interest rate cut in terms of its transmission to mortgage rates. 3 this is because interest on deposits and savings make up a considerable portion of banks ’ refinancing costs. whereas, in a positive interest rate environment, banks would not hesitate to pass on falling money market rates to holders of deposit and savings accounts, when rates are negative, they are reluctant to do so. this reluctance can partly be explained by the fact that retail bank customers regard cash holdings as an attractive alternative to bank deposits, and could withdraw their deposits if interest rates turn negative, thereby depriving the banks of an important refinancing source. thus, uncertainty over the collective behaviour of bank customers

could be seen as a factor dissuading banks from passing on negative interest rates. as a result, banks ’ liability margins – the difference between the interest on a maturity - matched alternative funding source and the interest on deposits – have dipped into negative territory. 4 this is clearly illustrated in chart 6. banks have responded to the pressure on liability margins by raising mortgage rates ( i. e. by increasing the asset margin ). in principle, the slight rise in mortgage rates is good news from a financial stability standpoint. so can negative interest rates even be regarded as a tool to combat imbalances on the cf., for instance, o. jorda, m. hp. schularick & a. m. taylor, betting the house, nber working paper 20771, 2014, m. d. bordo & j. landon - lane, does expansionary monetary policy cause asset price booms ; some historical and empirical evidence, nber working paper 19585, 2013, or l. gambacorta, the risks of low interest rates, ensayos sobre politica economica, 29, 64 : 14 - 31, 2011. the same applies to all bank loans. the bank ’ s total margin is made up of three components : asset margin, liability margin and transformation margin, minus any hedging costs ( so - called structural contribution ). bis central bankers ’ speeches mortgage and real estate markets? in my opinion, the answer is no, since, in a longer - term perspective, mortgage rates are still at very low levels. and imbalances on the mortgage and real estate markets remain high. chart 7a illustrates this using the relationship between developments in real estate prices and rents, while chart 7b does the same using the ratio of outstanding mortgages to gdp. in addition, despite a slight rise in mortgage rates, there are a number of other channels through which the prevailing low interest rate environment could further increase the risks to financial stability. i would now like to look at three of these risks in greater detail. risks to financial stability first, in the real estate market, there is an increasing focus on movements in the prices of residential investment property. both private and institutional investors, such as pension funds and insurance companies, can boost the demand for real estate investments even further, either through the search for yield, or because of a lack of other investment opportunities. yields on real estate investments continue to be well above those on alternative