Following its decision to raise interest rates last month, the Swiss National Bank is absorbing market liquidity by reducing overnight liquidity, recent data from the central bank showed.
The Swiss National Bank reduced the amount of sight deposits by around 30 billion Swiss francs ($30.2 billion) to 639 billion last week, the second largest decline on record since the measure was introduced in 2011, according to SNB data released Monday. The previous week, sight deposits decreased by a record 77.5 billion francs, according to the data.
The reduction is part of the SNB's decision to raise its benchmark policy to 0.50 percent from -0.25 percent last month to combat inflationary pressure. To maintain the Swiss Average Overnight Rate (Saron) at the desired 0.50 rate, the SNB has adopted a two-pronged approach. One element is tiered remuneration for sight deposits that banks and other financial institutions hold at the SNB. The second part is absorbing liquidity via open market operations.
Two ways the SNB manages liquidity are via SNB bills and repo transactions.
Maintaining SARON
Following the announcement of the rate hike, SNB governing board member Andréa Maechler explained the policy tools the central bank would use to maintain its policy rate.
«With these operations, we reduce the sight deposits and thereby the liquidity supply in the money market. In this way, we ensure that SARON and the other secured short-term money market rates remain close to the now positive SNB policy rate,» Maechler said.
«To absorb liquidity by way of open market operations, we will use two proven monetary policy instruments: SNB Bills and repo transactions. Participants in the Swiss franc money market are familiar with both instruments. We have used repo transactions regularly in previous years,» she added.
