Do negative interest-rates make Switzerland a currency manipulator?

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by Shaun Richards

When we consider the impact of negative interest-rates then we can learn a lot from Switzerland which qualifies by both how low they have gone and how long it has had them. The saga began back pre credit crunch when the combination of low Swiss interest-rates and ones higher elsewhere particularly in Eastern Europe was seen as an opportunity by some bright sparks. They organised deals where for example mortgage borrowers in Eastern Europe could borrow at near ( there was a fee of course) Swiss Franc interest-rates.Everyone’s a winner or so it appeared although the risk ( that borrowers had a currency position short the Swiss Franc) was there.

When the credit crunch hit the latter issue came to the front of investor’s minds and indeed to foreign currency borrowers wallets and purses. The safe haven status of the Swiss Franc saw it rally from its artificially depressed level and this was added to by the beginning of reversals of the carry trade. If we look at the Hungarian Forint we see that a pre credit crunch exchange rate of 143 was replaced by one of 200 in about 6 months and 260 at the end of 2011. As monthly mortgage payments were based in this there was a house of pain but from the point of view of the Swiss their currency rapidly became expensive.

Currency Manipulator

We can in fact bring this up to date.

WASHINGTON (Reuters) – The U.S. Treasury labeled Switzerland and Vietnam as currency manipulators on Wednesday…….. the Treasury said that through June 2020 both Switzerland and Vietnam had intervened in currency markets to prevent effective balance of payments adjustments.

Let me now switch to this mornings policy meeting at the Swiss National Bank.

In the light of the highly valued Swiss franc, we remain willing to intervene more strongly in the
foreign exchange market. In so doing, we take the overall exchange rate situation into consideration.

Not much rolling back there and President Thomas Jordan went further here.

Second, the negative interest rate and our foreign exchange market interventions counter the upward pressure on the Swiss franc. This pressure is especially high in periods of uncertainty,and a strong appreciation would weigh particularly heavily on the economy in the crisis. We
have therefore made considerable foreign exchange purchases this year to maintain appropriate monetary conditions.

More precise details were given by board member Maechler.

On a trade-weighted basis, the Swiss franc is almost 1.5%
stronger in nominal terms than at the end of June. It thus remains highly valued. As reported in our interim results, we carried out foreign exchange market interventions
totalling CHF 90 billion in the first half of this year. On a trade-weighted basis, the Swiss franc has strengthened some 5% in real terms since the beginning of 2020.

Indeed there was also this.

Indeed only last night the US Federal Reserve confirmed my To Infinity! And Beyond! Theme.

In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

For the moment it would appear that the US Federal Reserve is winning the currency wars.

Before I move on there is something of a curiousity in currency markets.

It may, then, provoke some alarm that the latest auction of three-month loans from the Swiss National Bank saw $1.2bn-worth of dollars granted, leaving the total amount of these loans outstanding at just short of $5bn. While that is nowhere near as high as during the spring — when around $11bn was outstanding — a few months ago the figure was less than $1bn. ( FT Alphaville 1st of December)

Actually I have just checked and it is now some US $7.2 billion according to the New York Fed. An extra US $1.34 billion was borrowed on the 9th for 84 days so taking us comfortably beyond the year end as someone sings along with Aloe Blacc.

I need a dollar, dollar a dollar is what I need
(Hey hey)
Well I need a dollar, dollar a dollar is what I need
(Hey hey)
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

The Policy Rate

This saga starts simply.

The SNB is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%.

It is the leader of the negative interest-rates pack for official rates although of course banks in the Euro area can access cash at -1%. Also it looks as though it will not be rising for quite some time.

In the longer term, the inflation forecast is unchanged from
September. The forecast for 2020 is negative (−0.7%). The inflation rate is likely to be higher again next year (0.0%) and slightly positive in 2022 (0.2%). The conditional inflation forecast is based on the assumption that the SNB policy rate remains at −0.75% over the entire
forecast horizon.

Indeed even if that were not true this would keep it there.

However, in October coronavirus also spread rapidly again in Switzerland. This has resulted
in a renewed deterioration in the economic outlook. The containment measures implemented
thus far are restricting economic activity less than was the case in the spring. Nevertheless,
momentum is likely to be weak in Q4 2020 and Q1 2021.
The SNB expects that GDP will shrink by around 3% this year.

So the idea that negative interest-rates would stop recessions has not worked.

Also there is this.

A moderate decline in yields was also observed in Switzerland. For example, the latest reading shows the yield on 10-year Confederation bonds just below the
mid-year values, at around –0.6% ( SNB)

As you can see the Swiss yield curve is almost flat and having just checked the thirty-year yield ( -0.37%) we see that not only does that continue but the Swiss are being paid to borrow across the yield curve. I wonder if they issued a century bond whether that would remain true?


I have left until now the point that this has lasted nearly 6 years. So any argument that this would be temporary has long gone and in fact it looks ever more permanent. Indeed 2020 has been more likely to see a further cut than a rise. This means that long-term investment has a problem as Swiss Info pointed out earlier this year.

Savers: For some years now, savings have been earning interest at rates just above zero.

Pension funds: Until about ten years ago, pension funds were able to pay substantial interest to their policyholders, thereby making a significant contribution to the growth of their old-age assets. This is no longer the case………The state pension scheme also faces similar problems, although to a lesser extent.

On the other side of the coin the SNB is in fact setting policies which help the government finance itself.

The State: With a total debt of almost CHF200 billion, the government, cantons and municipalities have largely benefited from the low cost of money.

Oh and the housing market.

Property owners: Because mortgage interest rates have been at unprecedentedly low levels for several years, property owners also benefit from negative interest rates. At the same time, the prices of houses and apartments in many regions of Switzerland have practically doubled within a decade.

Who gave the central bankers the power to transfer money from one group to another?



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