Swiss Impose Negative Rate Echoing 1970s Amid Russia CrisisZoe Schneeweiss and Jan Schwalbe
Switzerland imposed its first negative deposit rate since the 1970s and threatened further action to stem a tide of money flowing from Russia’s financial crisis.
Swiss National Bank President Thomas Jordan cited the Russian turmoil as a “major contributory factor” for the surprise decision to introduce a charge of 0.25 percent on sight deposits, the cash-like holdings of commercial banks at the central bank. The SNB also lowered its target range for the three-month Libor in an attempt to push the rate below zero. It fell to minus 0.046 percent today.
The SNB move hints at the investment pressures that resulted after Russia’s surprise interest-rate increase this week failed to stem a run on the ruble. Swiss officials acted as the turmoil, along with the imminent threat of quantitative easing from the ECB, kept the franc too close for comfort to its 1.20 per euro ceiling.
“What happens from here will depend in part on how the Russian crisis develops,” Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “We suspect that the SNB will soon have to follow up the rate cut with further bouts of currency intervention.”
Jordan said today the SNB resumed purchases of foreign currencies in the past few days after a two-year hiatus. Should additional measures be needed to protect its cap, the central bank will consider increasing the deposit charge or enforcing it more strictly, Jordan said, affirming policy makers’ commitment to defend the minimum exchange rate.
The franc weakened after the announcement, trading at 1.2038 per euro at 5:30 p.m. in Zurich. Against the dollar it fell to 98.02 centimes.
The Swiss currency was “experiencing renewed upward pressure vis-a-vis the euro in the last few days,” Jordan said. “Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development.”
The SNB said it expanded the target range for three-month Libor to a 100 basis-point band of minus 0.75 percent to 0.25 percent, with the aim of taking the rate into negative territory.
“The wide range of the new target for the policy rate is a clear hint that the policy rate could be pushed even further below zero if needed,” said Michael Saunders, an economist at Citigroup Inc. in London.
The sight-deposit charge is subject to exemptions that will be set individually for each account holder. For banks subject to minimum reserve requirements, including UBS Group AG and Credit Suisse Group AG, that will be 20 times the statutory minimum reserve requirement. Institutions without such obligations will be granted an allowance of 10 million francs ($10.2 million).
Foreign banks in Switzerland will probably be more affected by the charge than the country’s own lenders, as the former exceed the exemption threshold by a larger margin, according to data from UBS economists.
Negative rates will be imposed as of Jan. 22. The timing has caused speculation among central-bank watchers that the measure could be linked to the European Central Bank’s monetary-policy meeting scheduled for that day. Policy makers there are set to consider expanding debt purchases beyond covered bonds and asset-backed securities to prevent a deflationary spiral.
Jordan played down a potential link, saying that changes to terms and conditions on sight deposits required a 30-day notice period. An ECB spokesman declined to comment.
Switzerland last charged for deposits in the 1970s, when the government imposed negative interest rates on assets held by foreigners. The measure wasn’t very effective and can’t be compared to today’s decision, Jordan said.
“The SNB has responded to renewed crisis-induced capital inflows to Switzerland, while at the same time preparing for expected additional ECB measures,” said Christian Lips, an economist at NordLB in Hanover, Germany. “It should give the SNB some breathing space in its defense of the minimum exchange rate -- no more, no less.”
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