The Swiss National Bank (SNB) announced on Thursday, December 18th that it was introducing negative interest rates on commercial bank deposits. Analysts say the SNB has taken this extraordinary step to try and stabilize the rapidly appreciating Swiss franc in the wake of the Russian ruble collapse, which has led to frantic buying of safe haven currencies by holders of rubles.
Moving to negative interest rates means commercial banks have to pay to deposit their francs with the Swiss National Bank, when typically they receive at least some interest on their deposits.
However, the unusual step is apparently working for now. The euro is up 0.3% at 1.2043 francs following the SNB’s announcement.
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The SNB also emphasized in its statement that it is prepared to buy foreign currency in unlimited quantities and take other measures as required to control the rise in the Swiss franc.
ECB also currently has negative interest rates
The European Central Bank also introduced negative interest rates some moths ago, although the ECB is not trying to protect the euro with its action. The ECB is instead trying to encourage banks to lend to households and businesses in order to stimulate the economic recovery in the eurozone.
The SNB in a quandry
For the SNB, negative interest rates are all about preventing the Swiss franc from appreciating too much. That will hurt the exports and weigh on the Swiss economy. That;s why the SNB decided to introduce a rate of -0.25% on sight deposit account balances greater thab 10 million Swiss francs ($10.4 million).
The SNB noted the demand for safe investments such as the the Swiss franc has increased over the past few days given the ongoing crisis with the Russian ruble.
“Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments,” SNB President Thomas Jordan told a news conference in Zurich. “The worsening of the crisis in Russia was a major contributory factor in this development.”
Jane Foley, senior currency strategist at Rabobank International, commented that the decrease in food and oil prices and increase in deflation risks justified the strong action.
“On almost all measures the Swiss franc is a strongly overvalued currency,” she said.