SNB: Zero Policy Rate and Negative Market Rates
Monetary Base ≠ Money Supply
On 19th June, the SNB lowered its policy rate by 0.25% to zero. The SNB founded its decision to cut interest rates with reference to (dis-)inflation.
«Inflationary pressure has decreased compared to the previous quarter. With today's easing of monetary policy, the SNB is countering the lower inflationary pressure.»
Inflation has declined from 0.3% in February to -0.1% in May. This decline was mainly attributable to the development of prices in tourism and for oil products.
SNB’s new conditional inflation forecast is lower in the short term and the medium term:
It puts average annual inflation at
0.2% for 2025,
0.5% for 2026,
0.7% for 2027.
The forecast is based on the assumption that the SNB policy rate is 0% over the entire forecast horizon. Without the current rate cut, the forecast would have been lower.
Yet, how come that Swiss broad monetary aggregates are growing, while the SARON (average overnight interest rate) turns negative and SNB’s policy rate is zero?
The SNB explains in «Quarterly Bulletin 2/2025” that
The increase in the growth of monetary aggregates reflects the more pronounced decline in capital market interest rates relative to interest rates on bank deposits since 2023.
This increased the incentive to hold short-term bank deposits.
Additionally, lending growth and the associated creation of deposits also contributed to positive growth rates in the broad monetary aggregates.
Let me try to explore the key forces at play:
With SARON negative and the SNB rate at zero, interest-bearing deposits (like time deposits in M2 and M3) earn little or nothing - or even cost money.
This pushes households and firms to reallocate savings into more liquid forms:
M1 = currency + sight deposits
These increase because there’s no longer a reason to "lock in" funds in longer-term accounts.
This explains the surge in M1 (+13.0% YoY) - people are keeping more money liquid, instead of committing to longer-term deposits that offer zero or negative real returns.
And after a prolonged disinflationary period, investors may expect inflation or growth to stabilise or rebound.
If people anticipate that interest rates may stay low, but prices or wages may rise, they may shift behaviour:
Firms and households may hold more transaction money (M1) or precautionary balances (M2).
This boosts broad money even without new rate cuts.
Keep in mind:
The SNB has not tightened liquidity - it's keeping reserves ample.
The banking system can expand credit and deposit money more freely, especially when:
Confidence improves
Credit demand rebounds
Even if the SNB isn’t actively growing its balance sheet, M2 and M3 can increase by banks making loans.
In fact, in terms of excess reserve holdings, SNB’s goal behind the tiered remuneration is to incentivise lending between banks so that enough liquidity is exchanged on the Swiss money market.
In short:
The combination of zero policy rates and a return to mildly negative market rates (like SARON) makes liquid money more attractive than time deposits.
That shift in preferences - not aggressive monetary easing per se - explains why Swiss monetary aggregates are now growing strongly, especially M1 and M2.
Note:
Monetary Base ≠ Money Supply
Monetary Base is the raw material or foundation of money creation - it's what the central bank directly controls and provides to the banking system.
Money Supply refers to the broader measures (M1, M2, M3) that represent the total amount of money actually circulating and available in the economy for spending and investment.
The traditional "money multiplier" model is indeed outdated and doesn't reflect how modern banking actually works.
The central banks such as Bank of England (2014) and the Deutsche Bundesbank (2017) have been quite explicit about this.
The reality: loans create deposits.
Modern banking reality is that banks don't wait for deposits to make loans. Instead, loans create deposits through accounting entries.
