Swiss National Bank Cuts Benchmark Rate to 0% Amid Economic Pressures

The Swiss National Bank (SNB) has taken a significant step by lowering its benchmark interest rate from 0.25% to 0%, signaling a potential end to the high-interest rate era. This move comes in response to the economic pressures brought on by the COVID-19 pandemic, which has led to global inflation. The SNB's action also hints at the possible return of negative interest rate policies, particularly for bank current deposits that do not exceed the minimum reserve requirement.

The SNB's decision to cut rates to 0% was made on the same day, despite some traders anticipating a return to negative interest rates. The Swiss economy is grappling with deflationary pressures due to the continuous appreciation of the Swiss franc, which has led to a decrease in import costs and further lowered the inflation rate. This move by the SNB is seen as a proactive measure to stabilize the economy amidst these challenges.

The SNB's unexpected rate cut to 0% marks the first instance of a major central bank returning to a zero-interest rate policy. This decision raises questions about the future of excess reserve requirements and the potential reintroduction of negative interest rates. The global monetary policy landscape may shift as a result of this move, with other central banks potentially following suit in response to similar economic pressures. The COVID-19 pandemic has had a profound impact on global economies, and the SNB's actions reflect the ongoing efforts to navigate the complex economic environment.

According to the SNB's statement, banks in Switzerland can continue to place their current deposits with the central bank without interest, as long as they do not exceed 18 times the minimum reserve requirement. Any excess amount will be subject to a -0.25% interest rate. Financial institutions without reserve requirements will have a threshold of 100 million Swiss francs, approximately 120 million USD, before the negative interest rate applies. This tiered interest rate system is designed to encourage interbank lending and ensure sufficient liquidity in the Swiss money market. Banks holding excess reserves will find it more cost-effective to lend to institutions below the threshold, as the interest paid will be lower than the penalty rate charged by the central bank.

The SNB has implemented this mechanism since the key interest rate turned positive in 2022, resulting in the average interbank lending rate being a few basis points lower than the central bank's policy rate. This implies that from Friday onwards, the cost of bank financing could potentially turn negative, as stated by a member of the governing board. However, it is expected that only a small fraction of current deposits will be subject to negative interest rates, similar to the experience during the 2015-2022 negative interest rate period, when only a tiny proportion of deposits were charged fees.

Despite the return of negative interest rates in one country, the impact on the broader economy is expected to be minimal. The main lobbying group for the Swiss banking industry acknowledged the SNB's decision as understandable but criticized its implications. "A zero-interest rate environment will undoubtedly reduce the incentive for prudent saving and add pressure to the pension system," the Swiss Bankers Association stated. "As in previous low-interest rate periods, banks and their clients once again bear the significant burden of monetary policy."

The Swiss Insurance Association welcomed the SNB's decision not to fully reintroduce negative interest rates but emphasized that even a return to a low-interest rate environment poses challenges for the industry. The SNB's governor acknowledged the strain on banks from the new interest rate environment but suggested that further rate cuts are unlikely. "We will not make a hasty decision to implement negative interest rates," the governor stated. "However, it is important to note that the profitability of commercial banks is not a policy objective of the national central bank."

Some analysts view negative interest rates as a means for capital-strapped central banks to replenish their reserves after years of high interest rates leading to technical insolvency. However, given the small proportion of affected deposits, the revenue generated by the SNB from charging banks will be limited. Historical data shows that during the 2015-2022 period, the SNB earned approximately 12 billion Swiss francs from negative interest rates. However, since the interest rate turned positive (as of March 31 this year), the SNB has paid out 14.5 billion Swiss francs.