Dec 18, 2014 4:59 AM
Swiss central bank imposes negative interest rates
The Associated Press
BERN, Switzerland (AP) Following the fallout of the slide in the Russian ruble, Switzerland sought Thursday to prevent the Swiss franc from breaching upper limits imposed on the currency by introducing negative interest rates on commercial bank deposits.
The move forces commercial banks to pay to deposit their francs with the Swiss National Bank usually they get a small interest rate for doing so.
It's a step that the European Central Bank has introduced, too, though its motivation is to encourage banks to lend to households and businesses in order to shore up the economic recovery in the 18-country eurozone.
For the Swiss authorities, the desire is different. It's to prevent the Swiss franc from appreciating too much. That can hurt the country's exports and weigh on the economy. As a result, the SNB introduced a rate of minus 0.25 percent on sight deposit account balances of more than 10 million Swiss francs ($10.4 million).
The SNB said demand for safe investments the Swiss franc is widely considered one of the main safe haven assets in the world has increased over the past few days in light of the collapse of the Russian ruble, which has lost almost half its value since January. On Tuesday, at one stage, it was down 20 percent.
"Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments," SNB President Thomas Jordan told a news conference in Zurich. "The worsening of the crisis in Russia was a major contributory factor in this development."
The move appears to be working, at least in the short term. The euro is 0.3 percent firmer, at 1.2043 francs in the wake of the bank's announcement.
Jane Foley, senior currency strategist at Rabobank International, said the drop in food and oil prices and rise in deflation risks justified the action.
"On almost all measures the Swiss franc is a strongly overvalued currency," she said.
The SNB, headquartered in the Swiss capital Bern, emphasized that it is also prepared to purchase foreign currency in unlimited quantities and to take further measures, if required.
Since 2011, it has set the minimum exchange rate of the euro at 1.20 Swiss francs, helping sharply raise the value of major currencies like the dollar against the franc. But pressure has been rising on the Swiss franc, which has strengthened against the euro amid conflicts in Ukraine and the Middle East and the struggling eurozone economy. The Swiss franc rose to within 1 percent of the cap this week.
"The minimum exchange rate is still the key instrument to avoid an undesirable tightening of monetary conditions and to maintain price," Jordan said.