Switzerland Central Bank Statement

Author: | Published: 5 Sep 2017
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The Swiss National Bank (SNB) has a statutory mandate to ensure price stability in Switzerland and, in so doing, to take due account of economic developments. Currently, expansionary monetary policy remains the right course of action for the SNB because consumer price inflation in Switzerland continues to be low. Production capacity is still underutilised and the Swiss franc is significantly overvalued.

In order to fulfil its mandate and guarantee appropriate monetary conditions, the SNB is currently pursuing a strategy based on two elements: a policy of charging a negative interest rate on sight deposits held by banks and other financial market participants at the SNB, and a willingness to intervene in foreign exchange markets if necessary.

The SNB's aim, when it introduced negative interest on sight deposits in December 2014, was to restore, at least partly, the traditional interest rate differential between Switzerland and the rest of the world, in order to ease upward pressure on the Swiss franc. Given Switzerland's status as a safe haven for global investors, the Swiss franc tends to appreciate against most other currencies when global financial market conditions deteriorate. This leads to an undesirable tightening of Swiss monetary conditions and to a reduction in economic activity and inflation.

Negative interest on sight deposits achieved its aim and widened interest rate differentials through the standard interest rate channel of monetary policy transmission. Negative interest was quickly transmitted to short-term money market rates and money market rates have hovered close to the rate on sight deposits since then. Furthermore, this lowering of short-term money market rates has contributed to a decline in long-term bond yields. Consequently, negative interest is reducing the attractiveness of Swiss franc investments.

The transmission of negative interest to bank rates has been weak. Interest rates on bank customers' current and savings accounts had already been close to zero before the introduction of the negative interest regime and, for the vast majority of bank customers, they have remained close to zero since then; only large depositors have been charged negative interest. Mortgage rates declined, but less than might have been expected, because banks sought to maintain their interest margins which had been narrowing since the global financial crisis. Thus, the impact of negative interest on credit growth in Switzerland has been limited.

A special feature of the Swiss negative interest regime seeks to hold down the direct costs for banks: the SNB grants an exemption threshold whereby only balances exceeding a threshold of 20 times the minimum reserve requirement are subject to negative interest. This has limited the impact of negative rates on banks' profitability.

Overall, negative interest has proved to be a useful tool for loosening monetary policy. Together with the SNB's willingness to intervene in the foreign exchange market, it has helped stabilise Swiss franc exchange rates, and thus also consumer prices and economic activity.




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