Reflections On Negative Interest Rates In Switzerland
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• The inexorable decline in EUR/CHF is fostering market discussion of alternative policy measures to address CHF
strength
• Negative interest rates naturally attract attention given Switzerland’s use of these between 1972-1978. A
surcharge on non-resident deposits was sufficient to push net interest rates to -40% in 1978.
• The history of negative interest rates was not compelling – CHF still managed to appreciate by 75% through this
period. Only once the SNB explicitly abandoned monetary stability in favor of FX stability did the currency reverse
course.
• Negative rates do not overcome the fundamental ‘one tool, one target’ constraint on central bank policy. Unless
the SNB is once again willing to formally abandon price stability in favor of an exchange rate target, which we do not
believe it will, the most it can hope to achieve is to slow the pace of appreciation in the Swiss franc.
• Our strategy remains to be short EUR/CHF. We have also revised down our forecasts to a trough of 1.34 to reflect
the perceived erosion in euro area monetary stability and enhanced risks to the euro.
ENDS