Negative interest rates: SNB continues expansionary monetary policy

No end in sight. SNB sticking with negative interest rates.

The Swiss National Bank (SNB) has applied negative interest rates for nearly five years now. It is expected to continue this expansionary monetary policy for the time being. There is no end in sight for these negative interest rates for the moment.

Negative interest rates are at the tail end of a trend that has lasted decades

It happened in January 2015: The SNB was no longer able to keep the revaluation pressure on the Swiss franc in check. It removed its floor against the euro while also introducing negative interest rates. The negative rates are not just a result of the financial crisis, however. They are part of a global trend. Since the 1990s, both long-term and short-term interest rates have continuously fallen in many parts of the world. This development also occurred in Switzerland.

The main causes for the decline in long-term rates are that inflation has been curbed successfully and the fact that the real interest-rate component has fallen dramatically since the financial crisis. The short-term interest rates set by the central banks tend to track in the same vein, even if there are major differences over the course of the economic cycle.


Negative interest rates are the result of a long-term trend

Source: Datastream, Credit Suisse

SNB maintains its neutral monetary policy

With the base rate falling into negative territory and an otherwise very loose monetary policy, the SNB is always sparking debate in Switzerland over whether its actions are too expansionary. One sign of this is that Swiss credit growth has been much higher than economic growth in recent years. The current developments in the economy do not suggest the Swiss economy is overheating, however.

Other indicators also seem to suggest that the SNB is currently implementing monetary tightening. As such, the yield curve – i.e. the difference between the long-term and short-term yields – is still fairly flat. The Monetary Conditions Index – which maps the difference between the exchange rate as well as short-term interest rates and their respective fair values – suggests a tight monetary policy by the SNB. Über alle Indikatoren hinweg betrachtet, erscheint die Politik der SNB derzeit neutral.


SNB monetary policy is relatively restrictive according to the Monetary Conditions Index

Positive value: tighter monetary conditions
Negative value: looser monetary conditions

Source: Credit Suisse

Weaker Swiss franc due to negative interest rates

At the same time, the negative interest rates are causing the Swiss franc to weaken against the euro, which is a desired effect. This is because, aside from price stability, the SNB has focused primarily on stabilizing the exchange rate since the financial crisis. The method is working well as is evident if you factor in the current uncertainty in the global and European financial markets in addition to the changes in the interest spreads.

Under these circumstances, studies by Credit Suisse show that widening the interest spreads between Switzerland and the euro zone is certainly a tried and tested means to further weaken the Swiss franc against the euro. This is needed since the Swiss franc is still overvalued by around 10% according to Credit Suisse estimates.

No end in sight for negative interest rates

It is clear that abandoning the negative interest policy is not possible right now, particularly in an environment of global uncertainty. After all, a narrower interest differential could cause the Swiss franc to appreciate again, which would mean trouble for the Swiss economy. It would only be possible for the SNB to raise rates when the interest rates in the international capital markets start to climb again and the US Federal Reserve (Fed) or the European Central Bank (ECB) raise their interest rates. Neither of these scenarios seems likely for the time being.

As a result, there is no apparent end to the SNB's negative interest policy right now. However, there is limited room for maneuvering. The National Bank increased the exemption for deposits by banks effective November 1, 2019. Negative interest expenditures by domestic banks are thus likely to be around CHF 850 ​​million lower than they previously were. This also gives the SNB a bit more leeway should it need to make further interest rate cuts.


SNB made most deposits exempt from negative interest

Source: SNB, Credit Suisse