The Swiss National Bank (SNB)

The central bank of Switzerland that is responsible for the monetary and fiscal policy of the country is the Swiss National Bank (also known as SNB).

The SNB enjoys full autonomy regarding the establishment of monetary policies, which is done by a three-person committee. The members are: a Chairman, Vice Chairman and an additional member, who is also part of the SNB's Governing Board. Consensus voting is applied concerning the decisions that should be made. Every quarter revision of the monetary policy is made by the Board. However, announcements and decisions can be made any time members consider appropriate. A target range is set for the three-month Libor rate instead of one official interest rate.

An inflation target of below 2% inflation per year was set in 1999, which represented a move from the previously followed policy of setting monetary targets (M3). The national CPI serves as the basis for the measure. However, monetary targets are not ignored completely by the SNB since they serve as an indicator for the long-term inflation rates. Transparency is greatly increased due to the implementation of this new policy. If inflation levels increase above the pre-determined level, the bank will take the needed actions to reduce it. On the other hand, if deflation occurs, the monetary policy will be adjusted to meet the new conditions and stimulate the economy.

Inflation may occur if the Swiss franc increases too much in value, which is why SNB watches closely the exchange rates. When global risk aversion takes place, capital flows tend to go into the country in significant amounts. During such conditions, a weak Swiss franc is aimed to be achieved and the central bank usually interferes in order to achieve this devaluation. Some of the tools the SNB can apply include the currency itself and money supply.

In order to implement monetary policy the SNB uses the following tools:

1. Target Interest Rate Range

   The three-month interest rate of the SNB is referred to as the Libor rate. A target range is established for this rate, which is usually being reexamined once per quarter. The Libor rate is applied since it is of high importance to the investments in Swiss francs.

2. Open Market Operations

   The SNB applies repo transactions as its primarily instrument for implementing monetary policy. An agreement between a cash taker and a cash provider is reached under repo transactions so that the first sells securities to the second. These securities are agreed to be repurchased in the same amount and type when a particular time comes. The maturities of such repo transactions are typically very short (e.g. from one day to several weeks). When some unwanted moves in the Libor rate occur, the SNB tends to apply this policy. For example, if the Libor rate reaches a value above the desired one, the SNB will execute a repo transaction at lower repo rates in order to supply commercial banks with a higher degree of liquidity. The opposite is done in case the Libor rate falls below the desired level.

The Quarterly Bulletin is issued on regular basis by the SNB. Information on the current conditions that are prevailing in the economy and a revision of the monetary policy is included. Additionally, the SNB issues the Monthly Report, which includes information on the economic development of the country. Thus, both of these documents should be closely examined by forex market participants since they provide an insight to the current economic conditions of Switzerland.

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