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SNB Explains Negative-Rate Mechanics Amid Rising Deflation Risks

The Swiss National Bank outlined how it could use negative rates to buttress its currency cap amid increasing deflation risks.

SNB President Thomas Jordan said such a move would include a charge on sight deposits — the cash-like holdings of commercial banks at the central bank — and a target for three-month Libor below zero.

The SNB has stressed repeatedly that it is willing to take additional steps — including a negative rate — to reinforce its cap on the franc of 1.20 per euro. The prospect of further stimulus by the European Central Bank as early as next month has pushed the franc toward the upper limit the SNB introduced three years ago.

“The instrument of negative rates has already been tried by various central banks,” Jordan said at a press conference in Bern today. “We’ve made it clear that we don’t exclude any measure. In particular, we don’t exclude introducing negative rates.”

The SNB, with headquarters in Bern and Zurich, currently has its target for three-month Swiss franc Libor at zero to 0.25 percent. The rate fixed at 0.004 percent yesterday.

After its quarterly policy meeting today, officials affirmed their cap on the franc and committed to defend it with “utmost determination.” At the same time, they cut their forecasts for consumer-price growth for the next two years.

Policy Options

According to a survey by Bloomberg News prior to today’s rate decision, all but one of 27 economists forecast the SNB will step up interventions should pressure on the currency ceiling intensify. Seventeen see it introducing a negative deposit rate, following the ECB’s June move to charge banks for overnight deposits, according to the poll conducted Dec. 4-8.

With permanent excess liquidity in the Swiss financial system exceeding 300 billion francs ($ 307 billion), negative rates would have a bigger impact in Switzerland than they did in the euro area, SNB Board Member Fritz Zurbruegg said last month.

Charges on sight deposits “increase the pressure on domestic financial sector and asset prices,” said Evelyn Herrmann, an economist at BNP Paribas SA in London. “Given the tricky trade-off between the deflationary risks and foreign-exchange pressures on the one side and domestic asset-price imbalances on the other, we think the SNB will try to avoid additional policy measures as long as possible.”

ECB Stimulus

Sight deposits rose in the week of Nov. 21, possibly indicating the SNB had intervened to defend its minimum exchange rate for the first time since September 2012. The holdings fell in the two subsequent weeks.

“Sight deposits always fluctuate, there are various reasons for the shifts,” Zurbruegg said today.

In response to a question about whether the SNB had intervened of late, Jordan declined to give details on SNB transactions.

An expansion of stimulus in the euro area has become more likely after demand for ECB long-term loans remained below economist projections. The ECB said it allotted 130 billion euros ($ 161 billion) today, falling short of the 148 billion-euro median estimate in a separate Bloomberg News survey.

With euro-area policy makers aiming to expand the ECB’s balance sheet by as much as 1 trillion euros, today’s results will fuel the debate over whether the central bank needs to start buying assets such as government bonds.

To contact the reporter on this story: Catherine Bosley in Zurich at [email protected]

To contact the editors responsible for this story: Fergal O’Brien at [email protected] Jana Randow, Zoe Schneeweiss

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