The Swiss National Bank probably won’t have to take additional steps to defend its currency cap, even after the European Central Bank lowered borrowing costs.
The ECB today cut its key interest rate to a record low of 0.5 percent, as the 17-nation euro region struggles to emerge from a recession. That lowers the interest rate differential with the SNB, which has its target for three-month franc Libor at zero.
While the slimmer gap between the two should add to pressure on the franc, the Swiss currency weakened sharply against the euro after the ECB’s announcement, falling as 0.3 percent to 1.2259. It traded at 1.2208 at 4:55 p.m. in Zurich.
“I wouldn’t say it makes the SNB more likely to try something,” said Credit Suisse Group AG economist Maxime Botteron. “It really depends on the exchange rate and not on the rate differential.”
The franc, which investors buy at times of heightened uncertainty, nearly touched parity with the euro in August 2011, threatening to plunge Switzerland into a recession and prompting the SNB to set a cap of 1.20 per euro on the franc a month later. The Zurich-based institution, led by President Thomas Jordan, has repeatedly said it would take additional steps if needed.
The SNB holds its next monetary policy assessment on June 20, and Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London, believes further steps could be announced then.
“The chances of negative rates on bank excess reserves have increased,” he wrote in a note to clients today. “Penalty rates on banks’ excess reserves could help cheapen the Swiss Franc if the banks pass on the costs to their depositors and thus discourage inflows into the currency.”
For more than a year, investors and economists have wondered whether the SNB might impose some form of negative interest rate to dissuade investors from holding francs, repeating a tactic tried in the 1970s. Negative rates would supplement the currency interventions the SNB has used to defend its currency ceiling, and which rose ten-fold to 188 billion francs last year ($201 billion).
Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt, said in December that an ECB rate cut could force the SNB President Jordan’s hand by boosting the relative attractiveness of the Swiss currency.
“We would not expect negative rates to be a hurdle that the SNB would be unwilling to negotiate, should ECB action make this necessary,” Schumacher said in a note to customers.
The International Monetary Fund gave the SNB a green light on supplementary measures, saying in March the Swiss central bank should charge lenders on excess reserves if the franc were to rise again. SNB Alternate Governing Board Member Thomas Moser at the time affirmed that such a form of negative interest rates was a policy option the SNB would consider.
With euro-area tensions diminishing, the SNB finds itself in a less risky environment than just a few months ago: Capital controls for Cyprus are being eased, and the swearing-in of Enrico Letta as Italian prime minister last month, which brought an eight-week political stalemate to an end, helped push bond yields to their lowest in more than 2 1/2 years.
“It’s a good sign because it means the ECB is finally taking action,” Alessandro Bee, an economist at Sarasin in Zurich, said of the ECB’s decision to lower borrowing costs further. “It lessens the likelihood of there being a big accident in the euro area. I’d say it should weaken the franc.”