Swiss National Bank Re-introduces a Negative Interest Rate

December 18, 2014

Just a week after a quarterly Swiss monetary policy review that left settings unchanged, Swiss authorities in an unscheduled action adopted a negative 0.25% sight deposit rate, versus zero before, and changed the targeted 3-month Swiss Libor target to -0.75% to +0.25%.  The range previously had been 0-0.25% since August 11, 2011, and a one-sided exchange rate target on CHF/EUR was imposed less than a month later.  The changed thinking from a week ago was explained as follows:

Over the past few days, a number of factors have prompted increased demand for safe investments. The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate of 1.20 per euro. The SNB is prepared to purchase foreign currency in unlimited quantities and to take further measures, if required.

Negative Swiss interest rates didn’t work out well when employed in the past.  They were utilized extensively between 1972 and 1978 to counter Swiss franc appreciation.  In that decade, the franc nonetheless even outperformed the German mark.  Not only did negative rates not prevent continuing franc appreciation, but such allowed the Swiss money stock to grow faster than desired, and ensuing inflation also eventually surpassed the central bank’s comfort zone.  Reducing inflation and restoring the central bank’s old highly respected reputation for maintaining price stability took a very long time, during which the Swiss economy paid the price of comparative low economic growth.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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