Swiss negative rates won't disappear anytime soon. The policy of free money adopted by the central bank has been further entrenched by the outbreak of the coronavirus pandemic. Negative rates may now become the new norm, was the conclusion of a webinar organized by the Swiss Finance Institute.
The criticism levelled at the Swiss National Bank (SNB) and its policy was relatively hard in recent years. Negative interest has made life tough for banks and also pension funds as they were forced to take bigger risks to generate a return.
Economists claimed that the SNB had used up its ammunition and that it wouldn't be able to react should a recession take hold of the country. Now, the recession is here, and it is the deepest in almost half a century.
Demand Shock Follows on the Heels of Supply Shock
Hence the question of where negative rates and central policy will go from here, discussed at a webinar organized by the Swiss Finance Institute (SFI) together with finews.com on Tuesday evening. Professors Philippe Bacchetta of University of Lausanne, Urs Lendermann of the Bundesbank University of Applied Sciences and Alfred Mettler of University of Miami together wrote a policy paper with Markus Bürgi of the SFI, looking into the question of negative interest and its downside.
The current problems started with a supply shock, when governments across the industrialized world shut down their industries to stop the spread of the pandemic. That shock is gradually being replaced by a demand shock. How long this shock will last for is open to speculation and depends on the further development of the crisis.
Savings Rise – Investments Fall
The SNB, which is required by its mandate to also take into account the state of the economy, has no longer the option of a conventional rate cut, said Bacchetta, because the leading rate already is in deep negative territory. What is left is the purchase of foreign currency-denominated assets to prevent the franc from rising and fiscal policy.
The pressure on rates will likely persist for the foreseeable future. Savings will increase, while consumption is probably stagnant, investments are under pressure as demand for goods falls and inflation outlook has been revised down due the recession.
Doubly Frustrating
«Switzerland can't do much,» said Bacchetta. With real and nominal rates low for years, there is double frustration due to low returns and the very limited options available to the SNB. «The risk is that low rates become the new normal.»
Martin Schlegel, a deputy member of the SNB directorate, countered that the bank still had all its tools available. The bank can cut rates further and currency market interventions remain a tried-and-tested instrument.
But of course, the SNB also is aware that «the normalization of monetary policy in the major currency regions has been pushed further into the distant future by the crisis».
