Swiss National Bank in Hot Seat Facing a Global Wall of Easing

(Bloomberg) -- Swiss National Bank President Thomas Jordan is facing a new wall of pressure that could force him to push the world’s lowest central bank interest rate even lower.

The franc is already at the strongest in two years, and likely to move higher as the European Central Bank outlines plans for loosening. A dramatic shift toward parity could even prompt surprise action by Jordan before the next scheduled meeting in September. That’s something he’s not been afraid to do before, notably in 2015 with the shock decision to scrap the cap on the franc.

“There’s pressure on the SNB to act,” said Credit Suisse Group AG economist Maxime Botteron. “Especially if the ECB cuts by more than 10 basis points.”

The capital inflows boosting the currency reflect a slowing global economy that has investors searching for havens. Yet the SNB already has record-low interest rates and a swollen balance sheet, limiting its room.

If officials opt to intervene in currency markets again, they have to beware winding up in the crosshairs of U.S. President Donald Trump, who recently chided the ECB for weakening the euro.

The franc has gained more than 3% in the past three months, to about 1.10 per euro. ING Bank strategists say it could hit 1.05 as the market tests the SNB’s capacity to respond. UBS has closed short franc positions, saying the risk of appreciation in reaction to ECB and Federal Reserve easing is “now quite high.”

Here are the pros and cons of the options available to the SNB:

Interventions

If the SNB did have to act, currency interventions are likely to be the first course of action. Yet despite a massive increase in foreign currency reserves over the last decade, the franc has appreciated strongly, suggesting that while central bank may be able to even out big swings, it can’t curb its long-term appreciation.

There’s also the Trump risk. The Swiss only recently succeeded in getting themselves removed from the U.S. Treasury’s list of potential currency manipulators.

Rate Cut

The deposit rate is already at an eye-watering minus 0.75%, but Jordan has dangled the threat of another cut if needed, saying the SNB has room. Investors are increasing bets that such a move will happen.

There’s still a lower limit because at some point the sub-zero rates get counterproductive. It becomes cheaper to hoard cash and the distortions for financial institutions too painful.

The boundary isn’t clear. Swiss banks and pensions funds already bemoan the minus 0.75% rate, and while policy makers say there’s no systemic evidence of cash hoarding, a recent research paper on high-denomination bills indicated the contrary.

Tiering

Under the current system, not all the money banks have parked at the SNB gets charged -- sums amounting to 20 times an institution’s minimum reserve requirements get a free pass. Credit Suisse’s Botteron calculates that while more than 50% of SNB sight deposits were untouched by the negative rate as of end-2018, at the ECB the figure was just 6.2%.

One way for the SNB to ease further without using up its limited rate space is more restrictive sight deposit threshold -- say 10 or 15 times minimum reserves.

That idea has the backing of the IMF, which said recently that it’s feasible to move further into negative territory, “including by introducing a second, lower interest rate tier.”

--With assistance from Paul Dobson and Ven Ram.

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Paul Gordon

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