Switzerland’s central bank has introduced a negative interest rate on deposit accounts as it battles to ease the pressure on the Swiss franc.
Since the franc’s dramatic rise in the face of huge inflows during the financial crisis, the Swiss National Bank has sought to prevent the currency appreciating beyond SFr1.20 a euro, in a bid to stave off the threat of deflation.
The policy has largely worked, but in recent days the franc has come under renewed pressure as investors look for safe places to park their money amid concerns about the state of the Russian economy.
Thomas Jordan, chairman of the SNB, said haven demand had surged as the crisis in Russia unfolded, prompting the central bank to intervene to prevent the franc from breaching the SFr1.20 threshold. He declined to say how large the interventions had been.
To try and relieve the pressure on the franc, from January 22 the SNB will charge an interest rate of 0.25 per cent on account balances above a certain threshold held with it by banks and other financial institutions.
“Over the past few days, a number of factors have prompted increased demand for safe investments,” the bank said in a statement. “The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate”.
The SNB’s move follows rate cuts by other central banks battling to ward off deflation. The European Central Bank reduced its deposit rate to -0.1 per cent in June, cutting it again to -0.2 per cent in September, while Sweden’s Riksbank has also introduced negative deposit rates.
Markets reacted quickly to the decision, with the Swiss franc falling 0.6 per cent against the euro to SFr1.2079 in early morning trading. However, the currency later regained some ground to SFr1.2039, and some analysts questioned how lasting the impact of the central bank’s move would be.
“I don’t believe it’s a game changer, it is the bare minimum that the SNB needs to do if it is serious about holding the floor,” said Paul Meggyesi, foreign currency strategist at JPMorgan.
Steven Englander, foreign currency strategist at Citigroup, said: “If we start resuming the oil price drop, I think we will end up pretty close to the 1.20 level. Twenty-five basis points with a minus sign in front of it just isn’t enough to discourage the kind of safe haven flow that we were seeing.”
UBS, Switzerland’s largest bank, said it had “already levied fees to discourage interbank clients from holding excessive cash balances over the past two years” but would evaluate whether further steps were needed.
“Currently, there are no plans for negative interest rates on the accounts of retail clients,” the bank said.
Credit Suisse, Switzerland’s other large bank, took a similar line, saying it had no plans to impose negative interest rates on savings accounts.
There had long been speculation that the SNB could introduce negative interest rates, especially with the ECB expected to embark on a full-blown quantitative easing programme next year, which would weaken the euro.
However, the timing still surprised some analysts. “We had anticipated this move — as had the markets, but not necessarily at this point,” said Laurent Bakhtiari, an analyst at IG Bank in Geneva, pointing out that the SNB had made its announcement well ahead of the ECB’s next policy meeting in January.
Mr Bakhtiari added that negative rates on their own were unlikely to be enough to stem the pressure on the franc. “From now on, the SNB will constantly have to be one step ahead of the ECB if they want to defend the SFr1.20 minimum rate. Some other unconventional measures should be expected in the future,” he said.
Mr Jordan said the SNB was prepared to take further steps to protect the minimum exchange rate if needed, including pushing rates deeper into negative territory and lowering the threshold above which the negative rates were charged.
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