No end in sight for negative Swiss interest rates

The SNB set interest rates at -0.75% in January 2015 and have kept them in the same negative territory ever since Keystone

The Swiss National Bank (SNB) plans to keep interest rates in negative territory for the foreseeable future, SNB chairman Thomas Jordan said in a newspaper interview on Thursday. This means banks will continue feeling the pain as the central bank concentrates on stabilizing the franc.

The SNB set interest rates at -0.75% in January 2015 and have kept them in the same negative territory ever since. This is designed to deter foreign investors from piling their cash into Swiss francs, thus keeping the franc from appreciating too far.

Speaking to the Tages Anzeiger newspaper, Jordan said global economic conditions did not point to an easing of interest rates any time soon.

There are still structural problems in many places that maintain low inflation and weak growth,” he said. “Once these problems are overcome with reforms, generating additional growth, I expect that interest rate levels will rise. We are not there yet.”

“We still have slightly negative inflation in Switzerland, our production capacity is still not fully utilised and the franc is still clearly overvalued. Our expansive monetary policy is appropriate in these conditions.”

While Jordan’s words may sooth Swiss exporters, banks say they are feeling the squeeze of being charged to keep cash deposits.

“Cash, as banks offer it, is a subsidised asset because we do not pass on negative interest rates,” Daniel Kalt, chief economist of UBS bank recently told Reuters news agency. “Therefore for banks, cash is a certain problem. With each million in cash we get, it’s a loss-making business for us.”

Cost of keeping cash

According to filings released in September, the SNB has charged banks CHF1.1 billion ($1.08 billion) for the privilege of keeping cash holdings at the central bank since January 22, 2015.

The Alternative Bank Switzerland has decided to pass on the cost of negative interest rates to clients, while earlier this month Post Finance – the banking arm of the Post Office – said it would charge customers with at least CHF1 million in their accounts.

Negative interest rates have also resulted in an early Christmas present for the federal coffers with companies opting to pay their tax bills early rather than hang onto cash. In October, the government reported an expected CHF2.2 billion budget surplus as a result of firms rushing to get rid of cash reserves.

“People will probably laugh at the situation in Switzerland, where everyone is rushing to pay their tax bills, but it is absolutely rational,” Kalt told the Financial Times.

In Wednesday’s Tages Anzeiger interview, Jordan added that it was far too early to estimate the impact of the recent United States presidential election on global monetary policy.

“What we have seen so far is uncertainty,” he said. “We still don’t know what economic policies the United States will adopt in future. Therefore, a serious assessment is not yet possible.

“It will be important to assess the trade and fiscal policy of the new government and whether there will be changes in US monetary policy.”