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
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.