SNB Threat of Negative Rates Seen Unlikely on House Boom
Swiss National Bank President President Thomas Jordan is unlikely to make good on his threat of negative interest rates for now so as not to fuel the booming housing market, economists said.
Jordan said last month a shift in its ceiling on the franc or a negative rate on commercial banks’ excess deposits was in the SNB’s toolkit. That comment, made the same month that European Central Bank President Mario Draghi dangled a similar threat, prompted the franc to drop to below 1.26 per euro, the lowest in two years.
Still, the SNB, which already has rates at zero and a cap on the franc at 1.20 per euro, is limited in its actions as Switzerland faces the biggest housing boom in two decades, fueled by the central bank’s loose monetary policy.
“You’ve got the problem that the real estate market is tending towards overheating,” said Daniel Hartmann, an economist at Bantleon Bank AG in Zug. “If you did something more expansive -- like shifting the cap or using negative rates -- the fear would be you’d be making it worse.”
The SNB will leave its target for the three-month franc Libor at zero when it holds its next monetary policy review on June 20, according to all 21 economists in a Bloomberg News survey. It also will maintain the franc ceiling, the economists said.
“As long as the franc per euro is above the 1.20 lower limit, the SNB wouldn’t introduce negative rates,” said of Ralf Wiedenmann, an economist at Vontobel Asset Management AG.
The SNB started the ceiling on the franc in September 2011, after investors pushed it toward parity with the euro as they sought safe assets during the fiscal-debt crisis. The franc traded at 1.2320 per euro at 12:23 a.m. in Zurich, a decline of 2 percent this year. Against the dollar it traded at 92.37 centimes.
European stocks rose today, rebounding from their longest streak of weekly losses in 14 months, as investors awaited this week’s Federal Reserve meeting for signs on the pace of stimulus reduction. The Stoxx Europe 600 Index rose 1.2 percent to 294.68.
In selling francs in reaction to Jordan’s comments on the SNB’s tool kit last month, traders got “way ahead of themselves by speculating that the SNB will act with some new measure,” said Peter Rosenstreich, chief foreign exchange analyst at Swissquote in Geneva.
In what might be a model for the SNB to control its currency, Denmark cut the rate on its seven-day certificates of deposit to minus 0.2 percent last July after record interventions failed to stem the krone’s appreciation against the euro. The Danish central bank, whose mandate is to maintain a peg against the euro, raised the rate in January to minus 0.1 percent as the currency weakened.
Thanks to the SNB’s loose policy, the Swiss economy has grown steadily and its real-estate market is in the midst of its biggest expansion in two decades. The central bank has sounded the alarm on unsustainable home borrowing and is trying to prevent a repeat of the property market crisis in the 1990s, which led to the closing of a bank and hobbled growth for years.
In an effort to protect banks from a housing crash, the Swiss government in February, following a proposal by the SNB, introduced new capital rules as of Sept. 30. From that date, lenders are required to hold an extra 1 percent of risk-weighted assets linked to domestic residential mortgages.
Some economists say that by creating a disincentive to hold cash, enacting negative rates would probably just fuel the already booming Swiss property market.
“Negative interest rates would possibly even increase tailwind for the housing boom,” said Alexander Koch, an economist at UniCredit Group in Munich, who doesn’t think the SNB will change its rates at this week’s meeting. Michael Saunders at Citigroup Inc. in London agrees.
Switzerland’s “economy is already growing steadily and extra stimulus might well further fuel the pick-up in the mortgage and real-estate markets,” he said.
This view is echoed by banking executives, with HSBC Holding Ltd Chairman Douglas Flint saying at a panel at Switzerland’s St. Gallen University on negative rates last month that “I think you’d have a massive asset bubble problem.”
Economic growth in Switzerland has proved resilient. Growth of 0.6 percent in the first quarter beat expectations, and proved a faster rate than in Germany, Switzerland’s biggest trading partner and Europe’s biggest economy.
According to its March forecast, which it will update at this week’s meeting, the SNB expects growth of 1 percent to 1.5 percent this year.
Swiss consumer prices, on the other hand, have kept falling in Switzerland. They were down for their 20th-month running in May. The SNB’s mandate is one of price stability, meaning it aims to keep inflation positive though below 2 percent. Consumer prices are expected to contract 0.2 percent this year, before rising 0.2 percent in 2014, according to the SNB’s March forecast.
“The situation in the euro area is stabilizing, there are even signs of an improvement,” said David Marmet, an economist at Zuercher Kantonalbank. “The Swiss economy is looking pretty good in comparison to other European countries, so that doesn’t speak for emergency measures.”
European Central Bank President Mario Draghi said on June 6 the euro-area economy will return to growth by the end of the year, handing policy makers in the 17-nation currency bloc a reason to hold back on fresh stimulus. Just a month before, Draghi had left investors to ponder a menu of further measures, including negative rates, that the ECB might consider to aid growth.
Euro-area exports decrease in April for the first time in four months, declining a seasonally adjusted 0.8 percent from March, the EU’s statistics office in Luxembourg said today. Nominal hourly labor costs in the euro area rose 1.6 percent in the first quarter from the year-earlier period, a separate report showed today. In Germany, labor costs were up 3.9 percent, with wages rising 3.5 percent.
In Asia, Singapore’s exports fell more than economists estimated in May as manufacturers shipped fewer electronics. Non-oil domestic exports slid 4.6 percent from a year earlier, after falling 1 percent in April, the trade promotion agency said. The median of 10 estimates in a Bloomberg News survey was for a 0.2 percent drop.
The U.S. Federal Open Market Committee will hold its policy meeting tomorrow and the day after, with Fed Chairman Ben S. Bernanke explaining his stance after the decision on June 19. At stake is the Fed’s monthly purchase of $85 billion of Treasuries and mortgage securities and the target rate for overnight lending between banks, which has been kept at almost zero since December 2008.
The International Monetary Fund, which in March said the SNB could use negative rates if the franc faces another bout of appreciation pressure, said on May 21 that such a tool could help cool the real-estate market. For that to happen, banks would have to pass on the cost to clients in the form of higher mortgage rates rather than on to depositors, it said.
That’s in contrast to the Organization for Economic Cooperation and Development, which said last month that the SNB may have to raise rates to help control the country’s booming property market.
In Denmark, sluggish economic growth has depressed loan demand, preventing banks from charging more to make up the costs of the negative rates. Businesses taking up loans of 7.5 million kroner or more paid on average 1.58 percent in interest in April, the lowest rate since at least 2007, the country’s central bank said May 30.
Credit Suisse Group AG economist Maxime Botteron said it is hard to predict how Swiss banks might react. “How it would feed through the system isn’t clear at all, so I think the SNB will be careful,” he said.
While threatening to resort to more aggressive measures, SNB President Jordan has voiced qualms as to their introduction, warning last month of “side effects.”
Still, UniCredit’s Koch said negative rates could work if used in moderation, even while he doesn’t see the SNB taking such a step at this week’s meeting.
“A small negative interest rate would likely help to damp safe-haven flows as observed in Denmark,” he said. “But it would not be enough to have an impact on housing market dynamics in a significant way.”
Denmark’s experience has shown that a negative rate shrinks banks’ net interest income. The Danish central bank has sought to cushion the blow as the country’s lenders struggle to recover from a burst property bubble in its fifth year. The bank raised the amount lenders can hold in overnight accounts, which have a rate of zero.
The SNB doesn’t have that option as banks only have sight deposits with the SNB, meaning they can make withdrawals any time. There is no counterpart to Denmark’s weekly deposits.
“Negative rates are on the radar screen, but aren’t an option for June,” ZKB’s Marmet said.
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