SNB’s Schlegel Says Nobody Likes Negative Rates But They Do Work

(Bloomberg) — The Swiss National Bank doesn’t like negative interest rates but will use them again if needed to stem speculation in the franc, President Martin Schlegel said.

Speaking shortly after the central bank delivered a bigger-than-expected half-point cut in borrowing costs, the institution’s new chief repeated his threat to revisit subzero monetary policy if warranted.

“Nobody likes negative interest rates — also at the Swiss National Bank, we do not like negative interest rates,” Schlegel said on Bloomberg Television in Bern. “Of course we would also be ready to implement negative interest rates again if necessary. But with the cut that we did today, the probability of negative interest rates has been lowered.”

The large move on Thursday leaves the SNB just half a point — or two quarter-point reductions — away from zero. If upward pressure on the franc persists and officials keep cutting, they will soon need to choose between revisiting the negative policy stance they previously adopted and risking fallout on the financial system, or else bloating their balance sheet with market interventions.

Switzerland used a subzero policy for almost eight years to keep currency speculators at bay. It had the world’s lowest rate of -0.75%, and was the last economy in Europe to exit subzero conditions in September 2022. This week’s half-point cut has brought borrowing costs back to the same point they were at back then. 

“One very important lesson is that negative interest rates worked,” Schlegel said. “When we introduced negative interest rates in 2015 it was to lower the attractiveness of the Swiss franc, and this worked,” adding that this was “the main takeaway” from that period.

The franc fell to a two-week low on Thursday after the SNB’s rate cut, suggesting the move at least had an initial effect in what amounts to a new era of speculation in the currency after a hiatus during the recent global bout of inflation. 

Market pressure in the past year has intensified, stoked by investors’ view of Switzerland as a haven at times of political stress. Against the euro, the franc reached its highest in almost a decade last month. In September, it touched close to the strongest level against the dollar within that time period, though it has since weakened. 

Schlegel insisted that policymakers assess the situation across a basket of currencies and don’t just fixate on the euro.  

“We look at the situation as a whole, which means the Swiss franc effective rate,” he said. “If you look at the Swiss franc effective rate and even the real effective rate, the Swiss franc has depreciated since the beginning of the year.”

Schlegel didn’t want to be drawn on the SNB’s next steps, though he did say that policymakers can be nimble and meet between their quarterly decision schedule if needed.

What influenced Thursday’s move was his belief in acting “decisively and early,” he said. 

“To wait on cuts doesn’t make any sense,” Schlegel observed. “This would mean that we have a monetary policy that is too restrictive for the moment, and this would mean that also we have to lower or adjust rates more in the future. And this can also then lead to volatility, and this is certainly not in the interest of a central bank.”

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