The Swiss National Bank Slashes Interest Rate to Zero
Swiss National Bank decides on zero percent interest rate hike amid inflation worries
Zürich - Amid falling inflation, the Swiss National Bank (SNB) has slashed their policy rate to 0.00%, marking the sixth consecutive cut. The decision, announced on Thursday, despite monetary policy being the loosest among major economies, does not rule out negative interest rates in the future.
The SNB warned that the hurdle for introducing negative interest rates is significantly higher than if the rates were lowered within positive territory. Negative interest rates could have undesirable effects, particularly challenging for many economic actors.
Swiss consumer prices fell by 0.1% year-on-year in May, pushing inflation back into negative territory for the first time since March 2021. The SNB aims for price stability with an inflation rate between zero and two percent. In response, the SNB has reduced its inflation forecast for the short term compared to its last assessment in March.
With the latest monetary policy easing, the SNB is once more approaching negative interest rates. From 2014 to 2022, the central bank had already pushed its policy rates below zero but faced criticism. This time, the Swiss Bankers Association finds the rate cut understandable, although a zero-interest rate environment potentially undermines the incentive for responsible saving, putting pressure on retirement provisions.
As in previous low-interest phases, banks and their customers are bearing the brunt of the monetary policy burden. Martin Bardenhewer, Chief Financial Officer of Zürcher Kantonalbank, explains that a zero interest rate scenario is the toughest one for banks, as they do not impose negative interest rates on most customers. This psychological hurdle leaves no margin for banks when customer conditions are zero.
Despite concerns about deflation, the SNB might still need to further lower interest rates in the future, as downside risks for the economy and inflation remain heightened. However, introducing negative interest rates would have potential challenges such as large losses for the SNB, banking sector profit compression, reduced returns for investors, and a strong franc that dampens Swiss exports.
Investors expect the SNB to further decrease the interest rate in the coming months. The yields of interest-sensitive two-year Swiss government bonds indicate this, as they remain in negative territory. The SNB's governing board usually decides on interest rates four times a year at the end of each quarter. The next monetary policy assessment is scheduled for September 25.
While a rate cut is understandable given the subdued outlook for the global economy and dampened inflation expectations, economic experts suggest that the SNB's rate cut did not exhaust their monetary ammunition yet. They might still need it, as the downside risks for the economy and inflation are higher than usual.
The decision by the Swiss National Bank (SNB) to slash their policy rate to 0.00% marks a potential approach towards negative interest rates, a move that could have implications for business and finance, especially in terms of savings and investments. Despite the SNB's already having pushed their policy rates below zero in the past, the implementation of negative interest rates would present potential challenges, such as large losses for the SNB, banking sector profit compression, reduced returns for investors, and a strong franc that could dampen Swiss exports.
