The Swiss National Bank is caught up in an unenviable situation. With the unprecedented negative rate regime eating into people’s pension provisions, another reduction on Thursday is bound to be welcome fodder for political parties eager to be seen standing up for their constituents in the general election campaign.

It was canny timing by the Swiss Bankers Association, hinting at last week’s banker’s day that the financial industry soon may be forced to charge a levy on savings from even their not-so-wealthy clients. The hint prompted a furor on the same day as the European Central Bank (ECB) cut its rate – a development that no doubt will have caused some headaches over at the headquarters of the Swiss National Bank (SNB).

Swiss people don’t really care very much about monetary policy in normal times. Thomas Jordan, the SNB president, has charged Swiss banks interest on their cash deposits for almost five years. The commercial banks' job to generate a reasonable return on the not-so-risky instruments has become nigh-on impossible. The same applies to pension funds and the state-run pension system (AHV) – negative interest rates affects everyone.

A Time Bomb

So far, the banks refrained from charging the not-so-wealthy clients. Should they change their policy, as implied by the industry lobby, normal Swiss wage earners would not only see their pensions crimp but also their savings.

A time bomb for sure ­– and the reaction as presented by the media was predictable. «Monetary policy of the central banks is out of control,» said Swiss red-top daily «Blick». «Negative rates have long ago become counter-productive,» added Kurt Schiltknecht, former chief economist of the SNB, in a commentary for «NZZ».

No to Political Interference

When the populist media and the favorite newspaper of the business elite unites to cry foul, the going gets just a little tougher in Bern. Not least because voters will soon elect a new parliament. Dispossessing citizens of their hard-earned cash is never too popular. And the central bank is very sensitive about any form of political interference.

Most citizens will in principal support the central bank’s efforts to keep the franc from rising, because the Swiss manufacturing industry depends so much on a stable currency. Whether the negative rates actually have the desired effect has been questioned by a number of renowned economists and that will have had the alarm bells ringing.

What if the Economy Contracts?

Monetary policy has reached an impasse. A number of questions have arisen, questions that have the potential to weaken the necessary trust in the bank’s ability to steer monetary policy in the desired direction:

  • Why is the franc rising despite the negative rate regime?
  • Does it really make sense for the central bank to use its exclusive right on printing money to build up huge stakes in foreign companies? How does it fulfill its duties as a responsible shareholder?
  • When will the SNB start paring its balance – recently, the bank has been adding to the total again. The mountain of assets in dollar and euro will become a problem should politics demand the bank to cut the balance. And the question of a state fund in the vein of Norway isn’t off the table.
  • Is the focus on the exchange rate in line with the bank’s mandate to act in accordance with the interests of the economy?
  • What happens if the Swiss economy were to contract – despite the negative rates? Even bigger negative rates will probably not work.

Dependent on Exports

The policy of negative rates and interventions on the currency market has certainly helped reduce the pressure on the franc. The manufacturing industry, which is strongly dependent on exports, was able to adjust to a gradually stronger franc and hence remained competitive.

But the price that Switzerland is paying for this policy is not getting any smaller. And that's how pressure on the bank is mounting, not least because politicians need to be seen doing something for their clientele.

The Franc Goes Up, the Euro Goes Down

The key to a lot of what is hurting Switzerland is the «safe haven» effect – bolstered by the country’s economic and political stability. At the same time, the euro, the currency of Switzerland’s major trading partner, is inherently under pressure because some of the EU’s weaker member states are using it despite their inability to keep up with Northern Europe economic prowess.

So the franc is rising gradually and the euro is weakening gradually too, something that Swiss monetary policy can’t do much about.

The Limits of Monetary Policy

Recently, Bellerive private bank’s Thomas Steinemann asked in an interview with finews.tv why the country still kept its currency, given that the monetary policy had become a mirror image of the ECB’s.

The Zurich-based bank’s investment chief suggested that monetary policy reaches its limits when social unrest arises because negative rates impact on social insurance systems and the population understands that it has become a victim of monetary policy