Tokyo (SCCIJ) – At the August luncheon, more than 40 SCCIJ members and guests received important insights into the monetary policy and the central bank digital currency project of the Swiss National Bank, following a previous visit of an SNB delegation to Japan including a SCCIJ Luncheon in October 2022. The speakers were two SNB board members, Mr. Antoine Martin and Mr. Thomas Moser. We summarize their luncheon presentations in Q&A form.
Global financial markets experienced a big downturn, the Nikkei 225 in Japan for example lost more than 12% on August 5, the second Black Monday in Japan since October 1987. What do you make of it?
Mr. Antoine Martin: If you had slept for three weeks and would wake up on the luncheon date of August 21, it would look like nothing fundamentally happened because the big stock indices are at similar levels as in early August. Now, after markets have stabilized, it is unclear what to learn from the events. Is everything the same as before or did we see the first falling domino stone and we are living in a dangerous world?
What is your opinion?
A. Martin: One thing that is quite different from three weeks ago is the expectations for actions by central banks. Yields have fallen sharply, for example, the 2-year swap rates have come down quite a bit. They rebounded but they are still lower than before the stock market correction. Today, the markets expect three to four cuts from the Federal Reserve Board until the end of the year, a similar development happened in Europe, and the Swiss National Bank is expected to make two cuts instead of one.
Speaking about monetary policy: At the SNB’s most recent two quarterly monetary policy assessments, held in March and June 2024, the Governing Board reduced its policy rate by 25 basis points apiece. What are the factors that influence inflation in Switzerland?
A. Martin: Switzerland had a much lower inflation exiting the pandemic than many other countries. Compared to the US and the Eurozone, inflation peaked at a much lower 3.4 percent. And while inflation in the US and the Eurozone proved to be much more persistent, in Switzerland it quickly returned to the range we define as price stability.
How did the Swiss National Bank do it?
A. Martin: Our mandate is to bring inflation into the price stability range of 0 to 2 percent. We achieved this with a rather moderate raise of the interest rate. This is because we were able to sell foreign exchange and use the exchange rate as an additional tool. If the Swiss franc appreciates, less inflation is imported. By the middle of 2023, the imported inflation came down to zero, only domestic inflation was left. By having this additional tool, the SNB was able to bring the inflation into the range from 0 to 2 percent a lot faster. This is a success for Switzerland.
What is your inflation forecast for the future?
A. Martin: Inflationary pressure in Switzerland has become less broad-based. Over the medium term, inflation in Switzerland is expected to remain in line with price stability. Our latest forecast from June sees a rise of the consumer price index in 2024 of 1.4 percent, 1.1 percent in 2025, and 1.0 percent in 2026. In June we lowered the policy rate as our expectations for future inflation were slightly lower than in March. But the prospects for inflation are very positive. We will stay on top of it and keep it within our range of price stability.
Mr. Moser, the second topic at the luncheon was “Project Helvetia” at the Swiss National Bank. This name certainly sounds ambitious. What is it about?
Mr. Thomas Moser: Project Helvetia is our wholesale central bank digital currency (CBDC) initiative, in our case a digital Franc that is only available to financial institutions for wholesale transaction. The Swiss National Bank has been issuing wholesale CBDC as a settlement asset on the regulated SIX Digital Exchange since the end of 2023, utilizing distributed ledger technology, commonly known as a blockchain. This allows digital, token-based Swiss franc bond transactions to be settled directly in central bank money on the SIX Digital Exchange. With Project Helvetia, the SNB is playing a globally leading role in deploying wholesale CBDC in a live production environment.
Can you tell us more about these transactions?
T. Moser: Six banks in Switzerland are participating, among them UBS, Zürcher Kantonalbank, and Hypothekarbank Lenzburg. We had six commercial transactions, and bond issuances with a total value of 750 million francs. We also conducted a monetary policy transaction in a production environment using wholesale CBDC, becoming the first central bank in the world to do so. We just announced in June that we will continue this pilot for at least another two years.
The SNB does not intend to issue a retail CBDC, that is a CBDC for the general public. However, the SNB has tested some specific properties that such a CBDC should have. What are these properties?
T. Moser: In project Tourbillon we tested how we can enforce the privacy of digital payments and how to make accounts and transactions secure against future quantum computers which may crack currently used encryption methods. Privacy protection is a feature that is often mentioned as a desirable characteristic in CBDC surveys, and quantum safety is a topic that will become increasingly important in the near future. However, our main focus is on the wholesale project.
Are you also experimenting with cross-border transactions?
T. Moser: Cross-border is another use case for wholesale CBDC. Like the domestic cases, we are collaborating with the Bank of International Settlements’ Innovation Hub. We have completed two projects with the Banque de France and the Monetary Authorities of Singapore, and we are currently involved in Project Agora which involves seven central banks, among them also the Bank of Japan and the Bank of Korea. We are recruiting 30 to 40 commercial banks as partners to test settlements between financial institutions in several countries. We registered a huge interest in this project.
What will the future look like for a digital franc?
T. Moser: Central bank digital currencies and tokenized securities are still a niche market. In Switzerland, the digital exchange is an initiative of the private sector. If it is the technology of the future and whether this is going to take off is not our decision. If not, we can close the pilot. We are also open to alternatives to wholesale CBDC, for instance by linking the blockchain technology to our traditional, account-based settlement system. We are still in the process of finding what is the most efficient way to provide central bank money.
About the speakers
Mr. Antoine Martin has been a Member of the Governing Board of the Swiss National Bank since January 2024 and is also Head of Department III (Money Market and Foreign Exchange, Asset Management, Banking Operations, Information Technology, and the Singapore office). Before, he was a Senior Vice President from 2016 to 2022 and Financial Research Advisor from 2022 to the end of 2023 at the Federal Reserve Bank of New York.
Mr. Thomas Moser is an Alternate Member of the Governing Board of the Swiss National Bank and Deputy Head of the SNB’s Department III. He is also a member of the Managing Committee of the Swiss Institute of Banking and Finance at the University of St. Gallen, a Visiting Professor at the University of Lucerne, and a member of the Board of Directors of Orell Füssli Holding Ltd. From 2006 to 2009 he was Executive Director at the International Monetary Fund in Washington, D.C., USA.
Text and pictures: Martin Fritz for SCCIJ
