Photographer: ALESSANDRO DELLA BELLA/Bloomberg

IMF Tells Swiss National Bank to Lower Rates to Combat Inflows

  • SNB has policy of deposit rate at -0.75%, intervention pledge
  • Moser says SNB ‘fine’ with current balance of instruments

The Swiss National Bank should stop intermittent currency interventions and cut interest rates by a ‘moderate’ amount, the International Monetary Fund suggested.

While the central bank’s two-pillar policy of a key rate of minus 0.75 percent and a pledge to intervene in currency markets had been successful in lessening deflationary pressures, an adjustment of course is necessary, the Washington-based body said in its annual assessment of Switzerland.

“The potential losses grow as the balance sheet also grows,” IMF Mission Chief Rachel van Elkan said at a press conference in Bern. “So this is very much choosing between two instruments and finding the right middle ground. And we think at the moment there’s a bit more space on the interest rate.”

The SNB has accumulated some 627 billion francs ($648 billion) in foreign currency reserves, and admitted to interventions to stabilize the franc in the wake of Britain’s June vote to leave the the European Union. Based on sight-deposit data, some economists -- such as those at bank J. Safra Sarasin -- have said the central bank may also have intervened on other occasions.

Lower Rate?

“We feel that it would be preferable to use the interest rate to deter some of these low frequency inflows rather than constant, persistent purchases of foreign exchange,” van Elkan said, adding that interventions should be used for “sudden, large exchange rate appreciations.” 

In response to a question whether the SNB should go as low as minus 1 percent, she replied “It’s not anything of that scale.”

The IMF expects growth, which suffered last year after the SNB gave up the franc’s cap with the euro, to average 1.5 percent this year and said it foresees an acceleration to 1.75 percent in the medium term.

“Probably there is no ultimate limit, but expanding the size of the balance sheet does have a cost, and probably an increasing cost,” van Elkan also said. “In terms of how low interest rates could go, again it depends on the rest of the yield curve as well. There is of course a concern about a shift to cash. This has not been seen so far.”

Policy Balance

SNB Alternate Governing Board Member Thomas Moser responded by saying the central bank considered its policy appropriate, given current conditions. 

While purchases of foreign exchange have exposed the SNB to potentially large book losses, steeper negative interest rates could prompt investors to hoard cash.

“It’s important to keep in mind we’re talking about a refinement,” Moser said. “Lowering interest rates has costs, further interventions have costs -- it’s how you assess these two kinds of costs.”

“Currently we are fine with the balance of the two instruments,” he said. “But of course if there should be a change of the situation we’d reconsider it.”

Speaking at a separate event in Geneva, SNB President Thomas Jordan said regulators and central bankers face the challenge of fully understanding the effects and side effects of new financial-infrastructure technology.

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