Switzerland's central bank is hamstrung on negative interest rates, despite rising pressure on the policy. The banking industry is a prominent critic.
The debate over negative Swiss interest rates – manifested as surcharges on deposits in francs – has intensified in recent months. The banking industry, which is suffering from the cash policy and lack of interest income, is increasingly critical. On Monday, the Swiss Finance Institute issued a discussion note outlining the pros and cons of the policy.
Threat of Deflation
The SFI, which wrote the paper before the extent of the coronavirus pandemic and its economic effect was clear, homes in on whether the advantages still outweigh unpleasant side effects like lower savings income, inflation of assets, incentive for risk-taking, and a financial hit for pension funds). In an ideal scenario, the answer to the question would be «yes,» the SFI notes.
The real world is more nuanced – and the question is whether the Swiss National Bank is even in a position to reverse course. «If it were to increase its interest rate, this would most likely lead to an appreciation of the Swiss franc and to a reduction of economic activity» according to SFI professor Philippe Bacchetta (pictured above) from the University of Lausanne
«Deflation could set in. Long-term interest rates would decrease,» Bacchetta said. «In order to avoid the emergence of a 'new normal' in the long term, it is strongly advisable to continue a well-founded and economically sound discussion.»
Thorny Issue
«The SNB will have to carefully evaluate both sides, trying to keep the overall costs for the Swiss economy at a reasonable and fair level for all industry sectors, while making sure that it does not fail its mandate,» SFI professor Alfred Mettler (pictured above) of the University of Miami added.
The SNB overnight joined a U.S. Federal Reserve-led central bank effort to bolster U.S. dollar liquidity. The Fed has cut its benchmark interest rate to nearly zero, the second such step in two weeks amid the burgeoning health crisis.
- Click here to read the full public discussion note from the SFI.
