Switzerland is introducing a negative interest rate on deposits held by lenders at its central bank, moving to hold down the value of the Swiss franc amid turmoil in global currency markets and expectations that deflation is at hand.
The Swiss National Bank said in a statement from Zurich on Thursday that it would begin charging banks 0.25 per cent interest on bank deposits exceeding a certain threshold, effective January 22.
Negative interest rates are exactly what they sound like – depositing money actually attracts a charge rather than earning interest. The aim of this is to weaken the appeal of the Swiss franc, seen as a save-haven investment since the global financial crisis, by effectively penalising banks for holding franc deposits, and in the process shore up inflation.
The Swiss central bank acted as the crisis in Russia and plummeting oil prices have caused a run on emerging market currencies. Switzerland, known for its fiscal rectitude and banking secrecy, tends to attract capital inflows as money flees chaos elsewhere. But that has put pressure on the local currency, threatening to make exporters less competitive and raising the risk that very low price pressures will tip the economy into outright deflation.
"Over the past few days, a number of factors have prompted increased demand for safe investments," the central bank said. "The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate."
In September 2011, with the eurozone's sovereign debt crisis in full swing, the central bank announced a policy of capping the franc's value at 1.2 francs per euro, and said it was "prepared to buy foreign currency in unlimited quantities" to defend that level. It said Thursday that it remained committed to enforcing that policy "with the utmost determination."
Analysts were skeptical that the new policy would significantly reduce demand for Swiss assets while emerging markets were in turmoil.
"It's an external factor that has precipitated them to take this action," said Derek Halpenny, the European head of global markets research at Bank of Tokyo-Mitsubishi in London. "Is a negative interest rate going to solve their problem? I don't think so."
Still, Halpenny said, it was "a 100 per cent certainty" that the Swiss National Bank's 1.2-franc line in the sand would hold for as long as the central bank was willing to vacuum up as many euros as needed. The central bank maintains that floor by selling francs on the open market in exchange for euros, pushing down the franc and supporting the euro.
Since 2009, Halpenny noted, the central bank has quintupled its foreign currency holdings to 470 billion francs, as it intervened to hold down the franc.
The central bank said the new policy was meant to push its key interest rate - the three-month London interbank offered rate for Swiss franc loans between banks - below zero. Doing so would tend to mansw
Thomas J. Jordan, governor of the Swiss central bank, told a news conference in Zurich on Thursday that the effect on the rates paid on individual savers' accounts by banks was beyond the central bank's responsibility but that the move was "no different from any other interest rate cuts by a central bank."
The interest rates paid to savers in Switzerland are already extremely low, so there is little room for lenders to cut further.
In putting in place the negative rate, in essence a tax on excess deposits, the Swiss monetary authority joins the European Central Bank, which introduced its own negative 0.1 per cent deposit rate in June and then changed that to minus 0.2 per cent in September.
The European Central Bank action was aimed at a different problem: the failure of eurozone banks to increase lending to businesses, one of the factors that is holding back growth in the region. So far, the action has not borne fruit, and lending has continued to contract.
For the Swiss central bank, which seeks to hold inflation at the consumer level to less than 2 per cent, fears that an overvalued franc will choke growth and stoke deflation are real. Swiss consumer prices declined by 0.1 per cent in November from a year earlier. The Swiss central bank said Wednesday that it expected prices to be unchanged overall in 2014 and that next year, prices would contract 0.1 per cent, slipping into outright deflation.
Deflation hurts borrowers by increasing the burden of loan repayments in real terms, the last thing central bankers want when the financial system has not fully recovered from the global credit crisis. Falling prices also hurt the economy by reducing investment and consumption, and the monetary tools for addressing it are limited. But even the ultralow inflation being experienced in the neighbouring eurozone is hindering growth.
Short-term interest rates, the main lever for monetary policy in normal times, have been cut to rock-bottom levels across the developed world, and nominal rates cannot go below zero. That has led central bankers to try unorthodox measures, including charging banks to hold deposits.
The Federal Reserve cut its target for the federal funds rate, the rate that banks charge one another for overnight loans, to near zero six years ago. At a news conference in Washington on Wednesday, Janet L. Yellen, the Fed chairwoman, said that she expected to raise that rate sometime next year, but that the bank's policy board would be "patient."
Forecasts that rates would rise from near zero have been proved wrong for six years running, as the global financial system remained fragile and growth failed to reach pre-crisis momentum.
The New York Times
