Switzerland shifts to negative interest in bid to weaken Swiss franc

Switzerland is to charge its banks to park cash with its central bank in a bid to weaken its currency which has strengthened as a result of the crisis in Russia.

The Swiss National Bank (SNB) surprised markets on Thursday morning as it announced it was to impose a negative interest rate of -0.25% on commercial bank deposits from 22 January, in order to stem the rise of the Swiss franc against the euro.

Investors have piled into the Swiss franc as a safe haven currency as the Russian rouble has plummeted in response to falling oil prices and a looming recession next year.

The hope in Switzerland is that a negative deposit rate will discourage investors from buying Swiss franc investments, easing the rise of the currency.

Thomas Jordan, chairman of the SNB’s governing board, said the central bank was obliged to intervene to ensure its target of a minimum exchange rate of 1.20 Swiss francs per euro was met. He said the target would be pursued with the “utmost determination” .

Explaining the decision, Jordan said: “Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development.

“The minimum exchange rate is still the key instrument to avoid an undesirable tightening of monetary conditions and to maintain price stability.”

A weaker currency will make Swiss exports cheaper abroad, and imports more expensive.

Francois Letondu, economist at HSBC, said the central bank’s decision should eventually help a rebound of inflation – currently -0.1% – into positive territory.

The SNB’s move followed the European Central Bank’s decision in June to impose negative rates on banks for depositing cash, as part of a wider bid to boost activity and lending in the ailing eurozone economy.

Jordan said the central bank was prepared to buy unlimited quantities of foreign currency – and take further measures if required – to enforce the minimum exchange rate. He said the negative rate would remain in place “for the foreseeable” future.

The Swiss franc fell to its lowest level against the euro since mid-October after the move was announced, with one euro worth 1.20925.

Kathleen Brooks, research director at forex.com, said the decision had moved the Swiss currency “out of the 1.20 danger zone”.

“However in the longer term we think the SNB will need to embark on more action to stem [swiss franc] appreciation,” she said. Brooks also warned that the central bank’s move could be a precursor to a currency war in 2015, as other central banks seek a weaker currency.

“From a political standpoint, the SNB has a clear agenda to weaken the [Swiss franc]. This seems to be the policy of choice for a number of other central banks including the Bank of Japan, and even the ECB can see the benefits of a lower currency. While this has been tolerated so far, what about the other central banks that are looking to normalise policy? Will they be happy to lose this race to the bottom?”

Jordan said the decision to impose negative rates on commercial deposits would have no direct impact on retail savers. However, he said it would be up to individual banks to decide whether to change their lending and deposit conditions in response to the move.