The Swiss central bank won't yield to calls for a return to positive interest rates anytime soon. Quite to the contrary – after all, risks to global and Swiss economic growth have increased recently.
Swiss National Bank (SNB) President Thomas Jordan didn't mince his words at the bi-annual media conference held in Bern on Thursday: the times remain «demanding and difficult». And they have been that way ever since the onslaught of the global financial crisis more than a decade ago.
Premature End to U.S. Rate Cycle
In 2018, when the global economy was expanding at a rapid pace and Swiss growth reached above-average rates, hope spread that the SNB might eventually return to a more normal monetary policy – positive interest rates. A return that would have been welcomed by a Swiss banking industry hard-pressed to generate profits in an environment of negative interest rates.
Since then, the outlook has worsened again and the cycle of rate increases that had gathered pace in the U.S. much to the dislike of President Donald Trump has come to a premature end.
It Is the Very Long Term
«Seen from a global perspective, the point when rates will go up again has been pushed further into the future,» said Jordan in Bern. «In the very long term we will return into positive territory, but the timing is very uncertain.»
Jordan hence confirmed an assessment published by economists at U.S. bank Morgan Stanley earlier this week, who had concluded that the next rate move would be in the negative direction.
SNB's Paradox World
The reason for this development, which is most unwelcome from a perspective of financial markets, are the negative risks to the global economy, which have become «more pronounced» from the previous monetary policy assessment. Political uncertainty and trade tensions lead to a more negative sentiment, which meant that long-term rates in the U.S., the euro area and Switzerland have continued to decline, Jordan said.
The development to a certain extent would appear counterintuitive as economic indicators remained positive. Gross domestic product in Switzerland expanded at a healthy 2.3 percent in the first quarter, growth remains broad-based across the economy, employment is rising and production capacity is well utilized.
Room for Further Cuts
The more pessimistic appreciation of the economy both seen from a perspective of markets as well as the central bank seems mainly a function of risks (to free trade). And despite a growing economy, this perception is pushing the normalization of monetary policy far into the future.
Jordan was forced to impress on the media that the bank still has room to further ease monetary policy in Switzerland, both in respect to interest rates as well as further interventions in foreign exchange markets to keep the franc from appreciating further. Optimism about an imminent return to normality sounds quite differently in any case.
