SNB Chief Says Rates Can Go Even Lower04 November 2019
Further cut of interest rates may be on the cards according to the Swiss National Bank chairman Tomas Jordan, who spoke to NZZ am Sontag newspaper. Even though current, record low interest rates are being highly criticized by some industries, including banking one.
Still Room for More Cuts?
According to words of Thomas Jordan there is still space for further cut of interest rates, and it was not the first time he stated so. Currently a rate for deposit is at minus 0.75 percent in Switzerland, which is one of the lowest levels in world, and has been like that for the past five years. Switzerland is among countries that follow the very low rates policy, that is being popular in well industrialized economies. Jordan believes keeping low rates – or even cutting them further – is essential for not letting the Swiss franc exchange rate getting out of control (again).
CHF May Rise
Jordan sees the current exchange rate of CHF against major currencies, let’s say EUR for instance, as a bit overvalued. Strong Swiss franc may get even stronger, and rise very quickly in short time, should the negative interest rates policy be abandoned by the SNB. Also, if interventions of the bank on foreign markets, that include operations like buy euro or dollars to make Swiss franc less valued, also have to be maintained to stop CHF price from jumping up unexpectedly. Jordan stated that low interest “may be necessary” for long, long time, together with easing of monetary policy to further degree. He also stated that the bank’s “interest rate flexibility is not unlimited, but we have the opportunity to make further decreases”, which means there is room for further cuts. In fact, Jordan said that: “further cuts are certainly possible” and a “further loosening of monetary policy may become necessary under certain circumstances.” According to the SNB chairman, CHF is still highly valued, though not extremely overvalued like it used to be. But this is due to the fact, that the monetary policy has been strictly followed in last years by the SNB, and abandoning negative interest, interventions might bring negative impacts.
More Pros Than Cons
Would further cuts in rates make savers actually withdraw money and store it at home, as it would no longer be beneficial to have bank deposits? Such solution might bring more negative than positive outcomes, but Jordan does not seem to agree, and he said that risks and costs of storing large amount of money at home still are, and will be, more substantial than cons of negative interest rates. He acknowledges though, that there are side effects, and the SNB have never denied it. However, according to Jordan, there are still more positive effects than negative, and if minus interest rates policy was about to be dropped, CHF will become highly overvalued in exchange rates again and unemployment rate would rise.
Not Everyone Agrees…
The SNB is on the fight to stop appreciation of the Swiss franc as many investors buy Swiss franc as it is considered a safe haven asset. Meanwhile, bankers are on a mission of their own – as we wrote recently the Swiss Bankers Association believes the negative interest rates are harmful for banking, financial, economic situation, and this policy should be scrapped. Low interest rates are diminishing profits and returns for commercial banks not only in Switzerland, but in the whole Europe. Recently, Credit Suisse Chief Executive Tidjane Thiam called them as “not helpful to the banking sector”.