SNB Should Use Negative Rates If Franc Rises, IMF says

The Swiss National Bank should charge banks on excess reserves if the franc rises against the euro, the International Monetary Fund said today.

“In case of renewed appreciation pressures, the IMF believes that the SNB should introduce negative interest rates on excess bank reserves at the SNB,” IMF Mission Chief Enrica Detragiache said at a news conference in Bern today. SNB Alternate Governing Board Member Thomas Moser said this is an option.

The franc erased gains against the euro on the news, dropping to 1.2289. It recouped some of those losses and was trading at 1.2220 at 2:15 p.m. in Zurich, a rise of 0.4 percent on the day as the euro fell after a bailout of Cyprus.

The SNB imposed a ceiling on the franc of 1.20 per euro in September 2011 to help exporters and fend off deflation after it surged toward parity with the common currency. The central bank last week confirmed the cap and also kept the band for its benchmark interest rate at zero percent to 0.25 percent.

The IMF said the SNB’s cap should be maintained given risks from the euro-area debt crisis and should be kept as long as inflationary risks were not visible, according to a statement today following its annual Article IV consultation.

SNB Credibility

“Negative interest rates as recommended by the IMF are clearly one policy option that we consider,” SNB’s Moser said at a joint briefing with the IMF, welcoming the Washington-based lender’s conclusions.

The IMF’s backing strengthens the central bank’s position, said Peter Rosenstreich, chief foreign exchange analyst at Swissquote Bank. “The support from the IMF gives credibility and even validates the current policy of the SNB,” he said.

The SNB spent 188 billion francs ($199 billion) last year on interventions to defend the cap, and SNB President Thomas Jordan said last week the central bank was prepared to buy foreign currencies in unlimited amounts to maintain it. The SNB’s reserves now amount to nearly three quarters of the country’s of annual output. About half of those reserves are held in euros.

“If the SNB’s balance sheet risks grow, more aggressive profit retention and capital building would be advisable” on excess bank reserves at the SNB, IMF’s Detragiache said.

Because of the central bank’s loose monetary policy, Swiss real estate prices have risen strongly in recent years, as has mortgage lending. Last month, the Switzerland unveiled a capital buffer for banks to guard against risks in their mortgage books.

Low Debt

The IMF welcomed the steps Swiss authorities had taken to try and cool the property market, with Detragiache saying a there was no bubble yet. “If the risks continue to build in this area, the authorities should stand ready to implement additional measures,” she said.

Switzerland managed to emerge from the 2008 financial crisis less bruised than many other European countries in part thanks to its low government debt. Federal government expenditures are kept in check by a constitutional debt brake, and the federal budget finished with a surplus last year. Another is expected for this year. The State Secretariat for Economics forecasts growth of 1.3 percent this year, accelerating to 2.1 percent in 2014.

The IMF said it expects Swiss consumer prices, which have been negative from 17 months, to turn positive at the start of 2014. As long as the debt brake allows it, Switzerland should take a more accommodative fiscal stance in the current environment, the IMF said.

Serge Gaillard, director of Switzerland’s federal finance administration, said the country’s current fiscal policy is appropriate.

“We think it’s not necessary to be more supportive,” Gaillard said. “We expect a lower surplus than last year.”

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