Swiss National Bank reintroduces repos to steer interest rate

ZURICH, Jan 31 (Reuters) - The Swiss National Bank has started injecting money into the country’s banking system to steer interest rates downwards, the first time it has used the tool in more than seven years.

The SNB had 6.5 billion Swiss francs ($6.72 billion)in repo claims on its balance sheet in December, the highest figure since April 2012, according to balance sheet information published on Friday.

The increase could explain the recent rise in sight deposits - cash that commercial banks park with the SNB overnight - which have risen in recent weeks as commercial bank reserves grew.

A repo - or repurchase agreement - is an arrangement where a central bank provides liquidity to commercial banks by agreeing to buy securities such as government bonds for a short period of time in return for cash.

Under the agreement, the commercial bank agrees to buy back the security from the central bank at a later date.

Analysts said the central bank used repos to increase the liquidity of the interbank bank money market in Switzerland after cash availability tightened in November.

The SNB was not available for comment

In November the Swiss Average Rate Overnight (SARON) rose above -0.63%, above the SNB’s policy rate of -0.75%. That reflected the tightening in the interbank lending market as banks took advantage of the enlarged exemption threshold on negative interest rates.

Liquidity was also drying up as banks made more money available for customers before Christmas.

“We think there were technical reasons why the liquidity was not available on the inter-bank market, which in turn drove up the SARON,” said Maxime Botteron, an economist at Credit Suisse. “There was an increase in demand for liquidity from banks, but the supply was not able to match it.”

The SNB therefore stepped in and pumped money into the system through repos to steer the money market interest rates to its targeted level.

After its intervention in December, the SARON rate fell back to -0.71%.

“The allocation of liquidity between banks was not efficient, so we see in December that the SNB has stepped in to provided liquidity and dampen the spike in SARON,” said Botteron.

“I think the SNB will use repos in the future as a tool to steer interest rates where necessary.” ($1 = 0.9675 Swiss francs) (Reporting by John Revill, editing by Larry King)