Why negative interest rates are important during the coronavirus pandemic

A blessing or a curse? The role of negative interest rates during the coronavirus pandemic.

Not even our domestic economy has managed to escape the global environment of low interest rates that has become so prominent during the COVID-19 pandemic. They are what caused the Swiss National Bank to lower its prime rate into negative territory in 2015 in order to ease the pressure on the Swiss franc. They are also extremely important to most Swiss SMEs.

Negative interest rates controversial since their introduction

When the Swiss National Bank introduced negative interest rates five years ago, the move was highly criticized. Companies and investors were unhappy because they were forced to pay interest on relatively large stockpiles of cash – something that was previously unthinkable. Banks were also confronted with major challenges. What role is being played by negative interest rates even during the coronavirus pandemic was one of the topics covered at the third Entrepreneur Conference 2020 hosted by Credit Suisse.*

Are negative interest rates more of a blessing than a curse during this crisis?

During the Entrepreneur Conference, experts* Andréa Maechler, Hans Baumgartner, and Oliver Adler, with Sibylle Salzmann Ciarrocchi as moderator, discussed why negative interest rates are unavoidable in this environment. The answer seems simple: "Without negative interest rates, we would be in a much worse economic situation," says Andréa Maechler with certainty.

The level of uncertainty on the markets has taken on a whole new dimension with the outbreak of the coronavirus pandemic. Switzerland's gross domestic product (GDP) fell more sharply and rapidly than ever before in the second quarter. Although some sectors have experienced a rebound since the spring, the economy remains weakened, and many SMEs are continuing to grapple with low demand.

Coronavirus pandemic changing perception of negative interest rates

According to Andréa Maechler, negative interest rates have helped keep the collapse in GDP in Switzerland relatively small in contrast to other European countries like Italy, the United Kingdom, and Spain. That means they are also having specific advantages for Swiss SMEs. "Negative interest rates are creating favorable financing conditions for companies," explains Andréa Maechler.

In fact, some companies appear to have changed their minds about negative interest rates during the pandemic. "Most of them have now understood that this action is necessary," asserts Hans Baumgartner.

Swiss National Bank insisting negative interest rates are effective

SNB Governing Board member Andréa Maechler notes that criticism of negative interest rates has dwindled recently. She adds that the SNB is doing everything it can to keep the effectiveness of negative rates as high as possible, and the burden on banks and businesses as low as possible. For example, the SNB is granting banks a significant exemption so that the largest possible portion of their sight deposits are excluded from the negative interest rates. That way, banks feel less pressure to pass on the cost of the negative rates to their clients.

Switzerland cannot ignore the low interest rate environment

It was always clear to Oliver Adler that negative interest rates were needed in Switzerland to prop up the economy. "In Switzerland, a large part of the economy is dependent upon exports to the euro zone. When margins are tight and the economy is rather weak, then it is good for the Swiss franc to not be so strong," he says. As long as the economic situation remains uncertain, the SNB could insist on keeping rates in the basement. That is because the worldwide environment of low interest rates is the real challenge, according to Andréa Maechler. She says that Switzerland cannot simply ignore them.

There is therefore one thing the experts agree on: The Swiss economy will be dealing with negative interest rates for some time to come. Nevertheless, the future outlook is positive. Hans Baumgartner puts it like this: "The economy will adapt, and people will find a way to conduct business effectively under these conditions."

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