Switzerland introduces negative interest rates to weaken franc

The Swiss National Bank (SNB) has taken its deposit interest rate into negative territory for the first time since the 1970s to deter safe-haven buying and curb its strengthening currency.

Commercial banks will be charged a rate of 0.25pc on their cash-like deposits with the SNB from January 22 - the date of the European Central Bank's next policy meeting. The negative rate will only apply to deposits above SFr10m (£6.5m), though for banks required to park minimum reserves with the SNB, the threshold will be set at 20 times this requirement.

A flight to safety from the euro, and more recently from the Russian rouble, has pushed the Swiss franc close to Sfr 1.20 per euro - a floor for the central bank -in recent weeks. The ECB is expected to loosen monetary policy further at its January meeting to tackle the threat of deflation and pile more upward pressure on the Swiss franc.

The move immediately weakened the franc, sending it close to 1.21 per euro, though it has since climbed back towards 1.20 per euro.

"The SNB reaffirms its commitment to the minimum exchange rate of Sfr1.20 per euro, and will continue to enforce it with the utmost determination," the bank said in a statement.

"It remains the key instrument to avoid an undesirable tightening of monetary conditions resulting from a Swiss franc appreciation."

Thomas Jordan, SNB chairman, confirmed that the recent plunge in the Russian rouble was a "major contributory factor in this development".

He added that the bank would continue to buy unlimited quantities of foreign currencies to defend the 1.20 per euro floor, despite the SNB's balance sheet already holding Sfr460bn - more than 70pc of the country's GDP - in currency reserves.

The decision came a week after the bank decided to hold interest rates in the face deflationary pressures from the sliding oil price. Consumer price inflation in Switzerland has been flat for two months running.

However, at the time, SNB chairman Thomas Jordan stressed that the bank "was not hesitant to introduce a negative deposit rate if necessary".

The bank said the aim of the interest rate cut was to take its three-month Libor- a measure of the interest rates charged for bank-to-bank lending - to negative territory. It has now widened its target for three-month to -0.75 to 0.25pc, compared with the previous 0 to 0.25pc.

Michael Saunders, analyst at Citi, said the central bank's tactic of widening the range of its target was a "clear hint that the policy rate could be pushed even further below zero if needed".

Geoffrey Yu, currency analyst at UBS said the action should help in the short time by making new buyers "think twice" before buying up more francs. However others warned that the bank will need to take further action to maintain the 1.20 per euro floor.

Angelo Ranaldo, professor of finance and systemic risk at the University of St Gallen in Switzerland also warned of the unintended consequences.

"This measure could backfire if, rather than abroad, it pushed money towards asset bubbles such as property. This could undermine Switzerland’s financial stability,” he said.