Zurich: The Swiss National Bank said on Thursday it would impose negative interest rates on cash held by other banks at the central bank, seeking to discourage safe-haven buying by investors anxious about the crisis in Russia and oil’s slide.
In a brief statement, the SNB said it would impose an interest rate of -0.25 per cent on sight deposit account balances of over 10 million Swiss francs and expand its three-month Libor target range to -0.75 per cent to 0.25 per cent. The measures will take effect from Jan 22.
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.
“Over the past few days, a number of factors have prompted increased demand for safe investments,” the SNB said in its statement. “The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.” The central bank also stressed its determination to defend that minimum rate, a cap of 1.20 per euro for the franc, which the bank set the cap at the height of the Eurozone crisis in 2011 and said remained its key policy tool.
The franc, the most liquid safe-haven currency after the Japanese yen, has stuck close to the 1.20 limit in recent days as fears of a full-blown crisis in Russia and economic weakness globally prompted investors to seek safety.
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 Ipek Ozkardeskaya said the central bank will need to do more to defend the cap if the European Central Bank launches full-blown quantitative easing in the first quarter of next year.
“This is just a beginning, there is certainly more to come,” she 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 250 million Danish crowns ($41.38 million) in total.
Maxime Botteron, an economist at Credit Suisse, said the SNB could lower the threshold for negative interest rates on sight deposits if pressure on the franc increases.
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 313 billion Swiss francs in sight deposits with the SNB at the end of last week — around half the Swiss annual gross domestic product.
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.
