Swiss sight deposit drop supports central bank policy shift

ZURICH, Sept 26 (Reuters) - Commercial bank deposits held overnight by the Swiss National Bank fell last week by their largest amount in more than 11 years, underscoring the latest stage of the central bank's shift towards a tighter monetary policy.

Total sight deposits held by the SNB fell to 747.1 billion Swiss francs ($753.05 billion) from 754.5 billion francs, data showed on Monday, the biggest drop since weekly publication began in August 2011.

The SNB declined to comment on the reasons for the fall, but economists said it supported the SNB's move to higher interest rates after ending after years of negative rates last week.

The central bank said then it would use SNB bills and reverse repurchasing operations (repos) to absorb excess liquidity in the money market in order to steer Swiss Average Rate Overnight (SARON) close to its new policy rate of 0.5%.

Still, economists said it could take time for these instruments to have an effect, with Karsten Junius at Bank J Safra Sarasin saying only 521 million francs in SNB bills had been bought in the first round of auctions completed on Monday.

"Therefore the decline in sight deposits is not really reflecting the auctions," said Junius. "I expect there will be a much bigger impact from the sale of bills and reverse repos in the coming weeks."

A larger factor could have been the SNB not renewing the liquidity-providing repurchasing operations the central bank previously used to steer market rates when it had a policy rate of minus 0.25%.

Previously, the central bank had been providing liquidity to make sure enough of the banks' holdings with the SNB were subject to the negative rates.

"This shows the big change in SNB stance and supports their strategy of tightening monetary policy," said Credit Suisse economist Maxime Botteron.

"Instead of providing liquidity, which shows up in increasing sight deposits, to steer the negative interest rate, the SNB is reducing it to enforce its positive interest rate." ($1 = 0.9921 Swiss francs) (Reporting by John Revill; Editing by Alison Williams)