Imposes interest rate of -0.25% on sight deposits; expands Libor target range to -0.75% to 0.25%; SNB’s Jordan says could cut rates further; franc falls to lowest level against euro since mid-October
The Swiss National Bank announced a negative interest rate for the first time since the 1970s yesterday, hoping that by forcing banks to pay to deposit francs it can stem a flight to the safe-haven currency sparked by eurozone fears and crisis in Russia.
In a surprise statement, the SNB said it would impose an interest rate of -0.25% on the portion of so-called “sight deposits” — cash commercial banks and other financial institutions hold with the central bank — that exceeds a certain threshold.
It will come into effect on January 22, when the European Central Bank holds its next meeting.
Growing worries that plunging oil prices may send the eurozone into a deflationary spiral are expected to push the ECB to buy sovereign debt early next year, piling pressure on the franc in recent weeks.
Fears a full-blown crisis in Russia due to rouble weakness and political upheaval in Greece pushed the franc up further, threatening Switzerland’s export-driven economy, which sends the lion’s share of its goods to the neighbouring eurozone.
“Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments,” SNB Chairman Thomas Jordan told a news conference in Zurich. “The worsening of the crisis in Russia was a major contributory factor in this development.”
The franc, the most liquid safe-haven currency after the Japanese yen, has stuck close to the 1.20 limit against the euro in the past few days, despite central bank intervention. Jordan said the bank remained committed to buying up unlimited quantities of foreign currencies to defend its 1.20 per euro cap on the franc set at the height of the eurozone crisis in 2011.
The SNB’s balance sheet is already bloated with around 460bn Swiss francs ($474.81bn) in currency reserves, amassed during heavy interventions in the foreign exchange markets in 2012 to defend the cap.
The charge will not be levied on the first 10mn francs that financial institutions deposit at the central bank. For those banks required to park minimum reserves at the SNB, the threshold is 20 times this base requirement, meaning that, for some, billions of francs will be exempt.
The franc fell after the announcement to its lowest against the euro since mid-October and to its weakest against the US dollar since May 2013. By 1200 GMT, the franc had pared some of those losses and was trading 0.3% lower against the euro, with some economists cautioning the effect of the SNB’s measures could be limited.
“You can’t steer a currency with interest rate moves alone,” said Thomas Stucki, chief investment officer at St. Galler Kantonalbank. “The prospect of big profits if the 1.20 limit collapses is so great that speculators won’t be deterred by negative interest rates.”
Geoffrey Yu, a currency strategist at UBS in London said the SNB’s action should give it some breathing space in the short term. “If you hold Swiss francs right now you do have to bear a cost. New buyers will be forced to think twice,” he said.
But Swissquote analyst Peter Rosenstreich described the moved as “no silver bullet” and said the SNB will face pressure in the long-term to take more action.
“Clearly this was a signal to the markets that despite growing pressure on EURCHF and expectations that ECB actions will drive more capital into Switzerland, the SNB remains steadfast in defending the floor. Even becoming proactive,” Rosenstreich said.
The SNB also expanded its three-month Libor target range to -0.75% to 0.25% from 0.0 to 0.25% previously.
Jordan told the news conference he expected the measures to remain in place for the foreseeable future. He said the SNB stood ready to take further measures, including reducing interest rates further or reducing the threshold in which the negative deposit rate is charged.
Given the oil price and uncertainty on financial markets, inflation in Switzerland could be lower next year than the -0.1% forecast by the SNB last week, Jordan said.
Denmark’s negative interest rate on certificates of deposits, which ended in April, is widely viewed as a success, allowing the Danish central bank to keep the crown stable against the euro.
However, analysts estimate the policy, which was in place for nearly two years, cost Danish banks around 250mn Danish crowns ($41.38mn) in total.
Economists have warned negative rates could be expensive for Switzerland’s large banking sector and would also have an adverse effect on pension funds and money market funds.
Commercial banks held 313bn Swiss francs in sight deposits with the SNB at the end of last week - around half the Swiss annual gross domestic product.
Some rates in Switzerland are already effectively negative. The country’s two largest banks, UBS and Credit Suisse, introduced a form of negative interest rates on bank clients’ franc accounts in 2012 to deter rivals from hoarding the safe-haven unit by levying charges on those accounts.
Switzerland last imposed capital controls in 1972, when money surged in as the global fixed exchange rate regime broke down. But the curbs failed, and in 1978 the SNB capped the franc versus the German mark.
Thomas Jordan, chairman of the Swiss National Bank (SNB), addresses a news conference in Zurich yesterday. The SNB said yesterday it would impose an interest rate of -0.25% on the portion of so-called ‘sight deposits’ — cash commercial banks and other financial institutions hold with the central bank — that exceeds a certain threshold.
