Lights illuminate the facade of the Swiss National Bank's headquarters in Bern.
The Swiss National Bank’s resort to negative interest rates leaves President Thomas Jordan wielding a weaker hand when the European Central Bank ramps up stimulus.
Swiss central bank officials are now bracing for a month of currency speculation as the Russian crisis simmers on and a potential ECB quantitative easing decision on Jan. 22 threatens further pressure on the franc. While the SNB can toughen its response, any further action will probably lack the shock factor unleashed with yesterday’s deployment of a charge on deposits.
“The SNB’s arsenal has been reduced significantly,” said Julien Manceaux, an economist with ING Bank NV in Brussels. “On rates it can’t go too low, as this would cause imbalances in the domestic market, and a significant increase of the balance sheet would probably be politically difficult.”
The SNB, which created the franc ceiling in 2011, has dramatically stepped up its policy defense with a tool not used in Switzerland since the 1970s after the Russian crisis reached its borders with a deluge of investment inflows. In addition to the 0.25 percent deposit charge, officials ended a two-year hiatus on currency purchases to shield the 1.20-per-euro cap.
While the franc plunged 0.7 percent against the euro on the SNB’s announcement in Zurich yesterday, it reversed more than half the drop within hours. Jordan, renewing his pledge to defend the minimum exchange rate with “utmost determination,” insisted markets simply need time to understand what happened.
Think About it
“I don’t think the national bank used up its ammunition too early,” he told reporters in Zurich. “Many market participants have yet to fully comprehend the measures -- how strong and how drastic they will be, and what a burden they will pose on large account holders.”
Aside from further currency purchases to defend the franc, Swiss officials can tweak the deposit charge by either increasing it or by enforcing it more strictly.
“It’s hard to see what more they can do apart from using both instruments further,” said ING Bank’s Manceaux.
With negative rates not coming into force until Jan. 22, banks don’t need to react at once. Even so, Jordan’s pledge on additional measures if needed might be tested on the same date the deposit charge kicks in, as it coincides with the ECB’s first rate meeting of 2015.
Euro Storm
That day, the euro zone’s policy makers are likely to consider a large-scale purchase program forgovernment bonds to meet their ambition to swell the ECB balance sheet by 1 trillion euros ($1.2 trillion). Such a stimulus flood weakening the single currency might raise the prospect of renewed pressure on the Swiss franc.
“The SNB is at the mercy of the ECB and is bracing for a euro storm with all measures,” said Janwillem Acket, chief economist at Julius Baer Group Ltd. in Zurich. “The fact that the SNB chose Jan. 22 tells me that they would have liked to wait but were put under pressure because of Russia. They knitted the two things together quite elegantly.”
The date also falls in the middle of the World Economic Forum in Davos, when all eyes will be on Switzerland anyway.
“The SNB said repeatedly that it was ready to act immediately if needed,” said Maxime Botteron, an economist at Credit Suisse Group AG. “By setting negative rates, policy makers are simply following through on what they’ve pledged.”
To contact the reporters on this story: Zoe Schneeweiss in Zurich atzschneeweiss@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net
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