SNB's Jordan Sees Exemption Limit on Rates as Policy Tool

  • Swiss National Bank can still cut rates, pledges interventions
  • Says banks in Switzerland have coped well with negative rates

SNB President Thomas Jordan

Photographer: Michele Limina/Bloomberg

The Swiss National Bank could reduce the amount of leeway it grants banks on its negative deposit rate in a bid to prevent an already “significantly overvalued” franc from strengthening, President Thomas Jordan said.

QuickTake Negative Interest Rates

Still, reducing the threshold -- currently 20 times an institution’s minimum reserves -- isn’t an imminent step, Jordan said in an interview with Bloomberg Television in Washington on Saturday, where he attended the spring meetings of the International Monetary Fund and the World Bank. That’s despite mounting stimulus in the neighboring euro area from the European Central Bank.

“For the time being there is no plan to change the exemption threshold,” Jordan said. “As I said before, this could also be potentially a policy instrument,” he also said, affirming comments made earlier this year in an interview in Shanghai.

A newly expanded ECB bond-buying program is adding to euro-area liquidity that could push down the euro against the haven franc. That leaves economists wondering whether SNB policy makers could build upon their existing tools of a sight deposit charge of 75 basis points and a pledge to intervene in currency markets without inflicting unwanted damage to the financial system.

Jordan said that while he believes banks can cope with even deeper negative rates, “obviously, we have to analyze that exactly, and see under what circumstances we have also to make adjustments in that case to the system.”

Under the current threshold, 73 percent of domestic sight deposits are exempt from the deposit charge, according to Credit Suisse Group AG calculations.

Swiss banks’ profitability has been resilient to low interest rates, Moody’s Investors Service said in a report published Monday. Still, pressure on margins is increasing, Moody’s analysts led by Mathias Kuelpmann said, adding that “the SNB may be forced to cut interest-rates further into negative territory, before moving back towards a more normal slope during 2017 and 2018.”

Jordan acknowledged that negative interest rates pose “many, many problems” for life insurers and pension funds, yet said the phenomenon was not limited to Switzerland.

“This is a global environment,” it is an issue “in the euro zone, in the U.S. but also in Japan,” he said. In Switzerland, “so far, the banking system copes quite well with the negative rates.”

Since giving up its cap on the franc in early 2015, the SNB has relied on a two-pillar strategy of a pledge to wage interventions and negative interest rates to keep in check a currency that serves as haven for investors in times of crisis. While the franc has weakened 0.3 percent since the start of the year, at 1.09139 per euro, it is still above the 1.20 per euro mark the SNB defended between 2011 and early last year.

“There’s a willingness to intervene if necessary, and we can use our balance sheet if it makes sense,” Jordan said. The SNB already “went quite far” with its deposit rate “but there is still more room to go,” he said, declining to be more specific.

According to Bloomberg’s most recent survey of economists, the SNB can take its deposit rate to minus 1.25 percent before people begin to hoard cash to circumvent the charge.

Strong Franc

Because of the strong franc, Swiss consumer prices declined the most in six decades in 2015 and are set to remain for some time well below what the central bank considers price stability -- inflation close to 2 percent. Economic growth has also suffered, with output increasing just 0.9 percent in 2015. It’s set to accelerate this year, with the SNB predicting an increase of 1 percent to 1.5 percent.

“We depend a lot on the global economy,” Jordan said. “The exchange rate is important, of course, but also the global business cycle.”

The IMF cut its 2016 forecast for world growth to 3.2 percent last week from 3.4 percent projected in January, as weak exports and slowing investment dim prospects in the U.S., a consumption-tax hike saps growth in Japan, and a slump in the price of everything from oil to wheat continues to hobble commodities producers. The Washington-based lender sees 2017 growth at 3.5 percent.

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