Swiss Central Bank to Introduce Negative Interest Rates
Move Aimed at Curbing Demand for Swiss Franc
By Neil Maclucas, Andrew Morse
Updated Dec. 18, 2014 1:41 p.m. ET
ZURICH—Switzerland’s central bank Thursday said it would introduce negative interest rates to cool the strength of the Swiss franc, a move that comes as central banks across Europe scramble to protect their economies from the threat of falling consumer prices.
With its move, the Swiss central bank joined others in Denmark and the eurozone in enacting a policy aimed at discouraging banks from parking excess funds with the central bank. It highlights the divergent paths being taken by policy makers in developed economies as their economies recover at varying speeds.
In the U.S., the Federal Reserve is expected to start raising rates in the middle of 2015, while the Bank of England could follow suit later in the year. By contrast, central banks across much of the European continent may keep easy-money policies in place for years as their interconnected economies force officials to one-up each other on aggressive policy moves.
“Divergent monetary policies were very much a prospect already, but the latest events have been exacerbating this,” said Jonathan Loynes, economist at consultancy Capital Economics.
Beginning Jan. 22, the Swiss National Bank will charge banks 0.25% to deposit overnight funds with it, it said in a statement. The move will push the three-month Swiss franc Libor rate, currently in a range between 0.0% and 0.25%, into negative territory.
The SNB’s decision comes after months of pressure on the franc, which has strengthened to near 1.20 a euro, a level the central bank has pledged for the past three years to defend. A strong franc, which has benefited from haven buying and weakness in the eurozone economies, raises the risk of imported deflation and creates headwinds for the country’s exporters, many of whom depend on the European Union as a key market.
“The introduction of negative interest rates makes it less attractive to hold Swiss franc investments,” the SNB said in a statement, explaining the reasons for the policy. It added that it will continue to defend the 1.20 franc-a-euro level and “is prepared to purchase foreign currency in unlimited quantities and to take further measures, if required.”
The Swiss franc immediately dropped on the news, falling to 1.2098 a euro, its lowest level since October. The decision, made before the stock market opened, also buoyed Swiss shares with the benchmark SMI trading 1.3% higher.
In June, the European Central Bankintroduced negative interest rates on deposits with it, a move designed to encourage banks to lend rather than park money.
The ECB is expected by analysts to step up its stimulus efforts as soon as its next meeting on Jan. 22—the same day the SNB policy comes into force—by announcing a large-scale asset-purchase program that includes government bonds.
The SNB said the timing of its negative rate was unrelated to the ECB meeting and instead fulfills its obligation to give banks 30-days’ notice of its rate change.
The central bank of Denmark, which isn’t part of the eurozone, has also used negative interest rates.
“The SNB has bowed to the inevitable,” said Kit Juckes, macro strategist at Société Générale.
“If 2015 brings more ECB easing and the start of Fed tightening, it is going to be difficult to hold it and this may not be the last step they take.”
Europe’s challenge is complicated by tightly linked economies that operate under multiple currency and monetary policy regimes, with the ECB as the driving force, given its size. If the ECB takes aggressive stimulus measures, as it did in September and is expected to do early next year, the response is typically a weaker euro against other European currencies.
This damages exports from Switzerland, Sweden and other European economies that don’t use the euro and puts more downward pressure on consumer prices. The response of many of these central banks has been to loosen their own monetary policies.
Denmark’s most recent deposit rate cut came hours after the ECB lowered its rate again in September. Sweden’s central bank cut its benchmark lending rate to zero in October.
The SNB’s move will widen the range for three-month Swiss franc Libor, a key interest rate, to minus 0.75% to 0.25%.
The move is the first change to the SNB’s three-year policy of defending its minimum exchange rate through the purchase of euros, a practice which has seen its foreign currency reserves swell to more than 460 billion Swiss francs ($473 billion).
The SNB has intervened in currency markets in recent days, the bank’s chairman Thomas Jordan told reporters Thursday.
The SNB has insisted in recent months that it wouldn’t exclude the use of negative rates to discourage investor buying of the franc, but some analysts expected the central bank to wait for the next move from the ECB.
The SNB said the 0.25% fee will be charged on Swiss franc sight deposit balances that exceed a certain threshold, which will vary with account holders, but will be at least 10 million francs.
—Chiara Albanese in London contributed to this article.
Market TalkSNB Negative Rate Timing Bold, Says IG The Swiss National Bank’s decision to impose negative rates was anticipated, but it wasn’t thought likely to do it this soon, according to IG Bank. “The SNB implemented this tool well before the next European Central Bank meeting, where a proper QE will most probably be announced,” says analyst Laurent Bakhtiari. “The SNB played the first move very well, and from now on it will have to stay one step ahead of the ECB if they want to defend the 1.20 minimum rate, and some other unconventional measures should be expected in the future,” he adds. (firstname.lastname@example.org)
Swiss Bank Move Won’t Hit Property Sector says SNB Jordan The Swiss National Bank’s imposition of negative rates on bank deposits shouldn’t affect the country’s buoyant property market, according to its head Thomas Jordan. The SNB has alluded repeatedly in recent years to the “imbalances” developing in the market and together with the government has twice stepped in to force banks to raise the amount of capital they must set aside against the mortgages they extend. Mr. Jordan today however stressed that mortgage banks need to be “very cautious” when lending money in the current market environment. (email@example.com)
Negative Rates Might Be A Waste Of Time says Citi Historical evidence suggests negative rates might be a waste of time, strategists at Citigroup warn after the Swiss National Bank surprised markets by cutting rates into negative Thursday. SNB’s move sparked general demand for the dollar, while having a short-term impact on the Swiss franc exchange rate. Moreover, strategist Josh O’Byrne points out that while SNB caught the market offside, limited impact on domestic banks could dampen the move. (firstname.lastname@example.org)
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