Swiss National Bank introduces negative interest rates

Swiss National Bank cuts interest rates to -0.25%. Reaffirms 1.20 EURCHF floor. Will take more steps if necessary.

The Swiss National Bank, a while back introduced negative interest rates, moving -0.25% on sight deposit account balances and expanded its target range for the three month LIBOR to -0.75% – 0.25% and will be charged as of January 22nd 2015 and would be calculated on a daily basis and would be debited from the sight deposit account holders at the end of every month.

The negative interest rates would be applicable for balances that exceed a certain threshold and is applicable for sight deposit account holders such as banks, insurance companies, dealers and so on. The negative deposit rate, in no way affects the average customer having their savings deposited in their local banks.

The move by the SNB, hot on the heels of last night’s FOMC statement is reminiscent of October where a day later the Bank of Japan had expanded its QQE. The move by the SNB is indeed surprising as past rhetoric was that the central bank would adopt a wait and watch mode, keen to make its move after the ECB introduces QE earlier next year.

The surprise negative rate cut, which was expected but not before the ECB saw the EURCHF stage a massive rally after it opened the day at 1.20094. At the time of writing, EURCHF was trading at 1.2066 levels.

The SNB also reaffirmed its commitment to maintain the EURCHF 1.20 floor as well and would enforce it with ‘utmost determination’.

In its press release, the SNB cited that a number of factors have prompted demand for safe investments and that the introduction of the negative interest rates would deter investors to hold their investments in the Swiss franc. The SNB also noted that the Central Bank is ready to purchase unlimited foreign currency and is willing to take further measures if required. Weak inflation outlook for the region, and one that has plagued other economies as well is being seen as the catalyst with expectations of further easing steps which could be undertaken by the SNB.

On release of the news, CHF pairs understandably declined across the board. EURCHF lifted off the lows of 1.20094 trading at 1.2066, while USDCHF eased from lows of 0.9725 to trade near 0.98 levels. GBPCHF, which was choppy for the past few weeks rallied from the lows of 1.5199 to be trading near 1.528 levels.

While it is hard to speculate the preemptive move by the Swiss National Bank, the shift of interest rates to negative territory could perhaps be viewed as the ECB’s QE being an almost done deal, especially with the German Bundesbank and Benoit Coeure, in recent times expressing support on sovereign bond purchases, both of whom were considered to be staunch opponents to the ECB dipping its hands into sovereign bond purchases.

The Euro, single currency also declined on the news and looks poised to test the previous support level of 1.227 levels. Gold futures were relatively unchanged as the precious metal was seen to be stable trading near the $1200 level after yesterday’s decline to 1186.