• SNB has a twin policy of negative rates, intervention threats
  • Jordan has cut deposit rate to a record-low minus 0.75%

Not everyone’s a fan, but Thomas Jordan has little choice when it comes to negative interest rates.

Since his principal headache is the exchange rate, they’re the best available tool -- along with currency interventions -- for the Swiss National Bank president. With little government debt and no credit crunch, measures such as targeted lending operations or purchases of sovereign bonds, used by both the Bank of England and the European Central Bank to spur credit and inflation, aren’t on the table.

“The difference between the BOE and the SNB -- it’s striking,” said Alexander Koch, an economist at Raiffeisen Schweiz in Zurich. “The SNB needs the negative rate to maintain the interest-rate differential with the rest of the world and make the franc less attractive as an investment, rather than to boost domestic credit conditions.”

Jordan has never wavered in his defense of the SNB’s tactics -- and even keeps a constant threat of more easing. As policy makers, economists and academics debate the merits of sub-zero rates, a topic that may feature when central bankers gather at the annual Jackson Hole symposium this week, these graphs show why the Swiss went down that road.

The SNB has been battling weak inflation for several years, and cut its deposit rate to a record-low minus 0.75 percent in early 2015 to reduce the appeal of the franc when it gave up its minimum exchange rate. Prices plunged last year at the fastest rate since 1950. But there’s light ahead: the SNB forecasts inflation of 0.3 percent in 2017 -- the first annual advance since 2011.

Unlike its counterparts in the euro area or the U.K., the SNB isn’t buying government bonds. One reason, as noted by the central bank in 2009, is that the amount of state debt is “relatively small.” 

The Swiss bond market amounts to 67.1 billion francs, according to the Bloomberg Switzerland Sovereign Bond Index, while the SNB’s foreign-currency portfolio is roughly nine times as big. It stood at 609 billion francs in June. Another reason against bond purchases is that buying franc-denominated assets wouldn’t directly target the exchange rate.

Lending to companies hasn’t suffered in Switzerland. That’s a different state of affairs than in the euro area, where the ECB began operations in 2014 to stimulate bank lending to companies and households. The BOE, meanwhile, has had a program known as “Funding for Lending” in place since 2012. In fact, the SNB’s introduction of negative rates last year had the side effect of stabilizing the real estate market, which officials had warned was at risk of overheating.

In Switzerland, the negative rate has actually led to higher mortgage costs, Koch said. That “helps cool that market.”

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