The Swiss central bank has been astute at defusing a row by cutting the penalties for commercial banks' cash deposits, says Andreas Britt, an editor at finews.com, commenting on today’s monetary policy decision. The move allows the bank to reduce pressure on its decision-making board.

Today’s monetary policy statement by the Swiss National Bank (SNB) was eagerly awaited, because the central banks of Switzerland’s major trading partners, the EU and the U.S., both cut their rates in recent days. A cut in Switzerland therefore was also on the table. In the event, Thomas Jordan and his fellow decision-makers left the rate at minus 0.75 percent.

The decision as such won't attract undue attention (the rate has remained unchanged for almost five years), but the considerations published by the bank are worth a closer look.

A Threat to the Purse of Ordinary People

A move that will have attracted most attention on the financial market today affects the penalties that commercial banks are forced to pay to the SNB in exchange for its cash holdings – the negative interest. The SNB reduced the payments by changing the way it calculates the rates for the banks, arguing that he global low-rate environment had hardened recently. In short, the negative rates will stay, but banks will have to pay less.

The change allows the SNB to release pressure and to put the ball back into the feet of the Swiss Bankers Association. The main banking lobby last week equally deftly had let it be known that less-affluent savers would soon be asked to contribute to the negative interest banks were asked to pay. A threat that had been met with anger and led to a series of flustered stories in daily papers.

Releasing Some of the Pressure

If the middle classes not only see the predicted pension payments shrink due to demographics and the funds’ inability to generate much in terms of a yield, but furthermore were forced to pay for holding cash, pressure on the bank to stop the negative rate policy would mount dramatically. A change that banks yearn for as well.

But the SNB doesn’t want to return to what is perceived as a more normal monetary policy as yet because it still considers the Swiss franc as highly valued: «Negative interest and the willingness to intervene are important in order to counteract the attractiveness of Swiss franc investments and thus ease pressure on the currency,» the bank said in today’s assessment.

The Complaint Will Remain on the Table

The change in the way it calculates the interest for banks was a clever move. It has bought time for the bank, because the commercial sector will think twice about asking the not-so-wealthy savers to pay interest for their cash when they only just received a helping hand from the SNB. For sure, the price it was willing to pay is not going to hurt because the central bank doesn’t conduct its monetary policy in a bid to generate profits but because it has to act in support of the economy.

But today’s change doesn’t do away with the complaint as such, namely that negative rates are a source of great concern for banks and pension funds providers. The criticism may be a little less outspoken for a while, but it won’t go away.

What Ammunition?

The decision published today raised a few other questions as well. Most observers had concluded that the bank wouldn’t cut rates further. But the bank’s considerations beg the question whether the bank actually has enough ammunition to come to the help of the economy should its start to contract. After all, money for investments has been free of charge for all concerned for almost five years.

The SNB today wrote that the franc had appreciated, that inflation prospects had eased and economic growth had slowed compared with its last assessment in June. The bank now expects an inflation rate of 0.2 percent in 2020 while growth will measure up to somewhere between 0.5 percent and 1 percent this year. In June it had expected a rate of 1.5 percent.

And yet, with all the factors indicating a slowdown, with two dominant central banks cutting their rates, and with the risks to global growth, the Swiss central bank kept borrowing costs steady. It argued that the economic outlook in Switzerland was good enough and that the job market remained upbeat. True for sure, and the hope is that things remain upbeat – because if the economy gets into trouble, how much more can the SNB offer in support? In other words, is it keeping interest rates steady because there isn't that much ammunition left?