Friday, 06 June 2014 19:59
ZURICH: A cut in rates by the European Central Bank this week may spur the Swiss National Bank into action if the franc rises too strongly, but ample liquidity and booming house prices mean it will probably hold back from introducing negative rates.
The ECB's decision to cut its deposit rate to below zero on Thursday is expected to make Switzerland relatively more attractive as a destination for money, potentially challenging the SNB's 1.20 per euro cap on the franc if the currency appreciates significantly.
"I can understand some concerns for economic growth, but the good thing about Switzerland is we're small, we're nimble, we're fast, we survived a 30 percent (appreciation) of our currency," said Tiffany Burk, an analyst at Western Union.
"I think the SNB will recognise that and not necessarily have to move in conjunction or in coordination in any way with the ECB." But the SNB will still face policy questions if it is to maintain its pledge to protect the Swiss economy from an overvalued exchange rate.
Although moves in the franc were limited on Friday, with economists saying much of the ECB cut was already priced into the market, the currency is trading near a one-month high against the euro at 1.2171 francs per euro.
Near-term options pricing indicating speculators are increasingly biased towards more franc strength in the coming few weeks.
The SNB capped the franc at 1.20 per euro in September 2011 after investors fleeing the debt crisis bid the safe-haven unit up to record levels, but it has not had to defend the limit by selling francs in more than a year.
"Given that the SNB's strategy of market intervention has been quite successful so far, I think it will probably do more of that in the first instance if it's concerned the franc will appreciate against the euro," said Jennifer McKeown, economist at Capital Economics.
"We still have quite a bit of a safety margin to that 1.20 benchmark that the SNB has set," said Karsten Junius, economist at J. Safra Sarasin. "I think the SNB can simply wait and see what happens."
Before that though, other Swiss assets could still feel the brunt of the new policies unveiled in Frankfurt on Thursday. Switzerland's benchmark SMI equity index rose 20 percent in 2013 but so far in 2014 it has underperformed southern European markets, rising around 5 percent - less than gains of 16 percent on the Italian FTSE MIB equity index and 10 percent on Spain's IBEX stock market.
"I would expect the impact on the Swiss market would be for it to underperform, partly due to its defensive nature and partly as ECB action will help to stimulate the Eurozone economy," said Kevin Lilley, who manages the Old Mutual European Equity Fund and is "underweight" on Swiss equities. DOWNSIDE OF NEGATIVE RATES
While the SNB does not rule out negative rates as a way of defending its currency cap, the healthy credit environment in Switzerland and an overheating housing market have led economists to question the likelihood of the SNB following the ECB's example.
Some residential real estate prices in Switzerland have, in real terms, exceeded the peak reached in the early 1990s that was followed by a sharp correction, the International Monetary Fund said in a report last month, though it noted imbalances on the market were building at a slower pace than last year.
"In this context, lowering interest rates further is probably a move the central bank would like to avoid," economists at Pictet said in a note.
In fact, some rates in Switzerland are already effectively negative.
The country's two largest banks, UBS and Credit Suisse, introduced a form of negative interest rates on bank clients' franc accounts in 2012 to deter rivals from hoarding the safe-haven unit by levying charges on those accounts.
Yields on three-month Swiss government bills are negative, as is the call money rate charged by banks on their loans, while the SNB has maintained a target range for the three-month Libor close to zero.
"In effect Switzerland does have negative interest rates in one form or another anyway," said McKeown at Capital Economics. "I'm not sure how much difference (introducing negative official rates) would really make." Switzerland last introduced capital controls in 1972, but these failed, prompting it to cap the Swiss franc against the Deutsche mark.
Denmark's negative interest rate on certificates of deposits, which ended in April, is widely viewed as a success, allowing the Danish central bank to keep the crown stable against the euro.
However, analysts estimate the policy, which was in place for nearly two years, to have cost Danish banks around 250 million Danish crowns ($45 million) in total. In Switzerland, negative rates would likely involve a charge on so-called sight deposits, or the cash commercial banks hold at the SNB.
These amounted to 304 billion Swiss francs at the end of May for domestic banks, representing more than half of Swiss GDP.
Negative rates could therefore be expensive for Switzerland's banks, while also having an adverse impact on pension funds and money market funds, economists have said. Copyright Reuters, 2014