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Swiss National Bank Introduces Negative Interest Rates

The Swiss National Bank (SNB) has imposed negative interest rates in order to maintain its exchange rate of CHF 1.20 per euro.

The new rate of –0.25 percent applies to sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative territory. Negative interest will be levied on balances exceeding a given exemption threshold, according to the SNB press release.

As The Guardian noted, “Switzerland’s problem is that the franc has become too strong since the financial crisis began. It’s a safe-haven asset, so when the eurozone crisis began five years ago investors piled into the franc.”

In theory, an account owner will be charged for having too much cash in a bank account and would seek to move the funds elsewhere, such as investments demoninated in another currency.

In reality, the policy can lead to unintended consequences. “In Denmark, commercial banks aren’t passing on negative rates to depositors for fear of losing customers.  When banks absorb the costs themselves, it squeezes the profit margin between their lending and deposit rates, and might make them even less willing to lend,” according to a Bloomberg report.

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