SNB Disregards Critics as Franc Keeps Negative Rates in Play

(Bloomberg) -- Swiss National Bank interest rates are stuck to the floor and 2019 could see criticism of the policy growing louder: The financial sector hates it and there’s trouble brewing in the real estate market.

After nine years of economic growth and the eradication of deflation risks, the arguments are building for the SNB to call time on the world’s lowest rates. Switzerland’s banks blame them for crimping profits, and insurers are pumping money into property to get better returns, creating a potential bubble.

According to the Swiss Bankers’ Association, the effectiveness of SNB policy is diminishing as its risks increase. But as the four-year anniversary of the minus 0.75 percent benchmark approaches, President Thomas Jordan’s focus remains on the franc. He’s concerned that tighter monetary policy could push it too high against the euro, hurting exports and the wider economy.

“It was sensible to introduce them in 2015,” said Daniel Kalt, an economist at UBS in Zurich. Yet “the balance between costs and benefits is increasingly shifting against them.”

The SNB set the rock-bottom rate when it scrapped a currency cap that had forced it to spend massively on interventions.

With markets volatile, the currency is now at just over 1.13 per euro -- far stronger than the level of almost 1.70 before the financial crisis or even the 1.20 mark at which the SNB had its cap. The franc was up 0.5 percent at 1.1243 at 1:31 p.m. in Zurich.

Jordan said this month that shifting policy isn’t necessary and could even be “counterproductive.” As for difficulties for banks and pension funds, he argued that it’s the low-yield environment generally that’s to blame.

“They should begin very quickly with the abolition of negative rates,” said Kurt Schiltknecht, who was chief economist at the SNB in the 1980s before a career in commercial banking. “One needs to make things that hurt the economy disappear as quickly as possible. But I don’t think the SNB shares this opinion.”

The record-low rate initially appeared to help curb Swiss property exuberance as banks pushed up mortgage rates to compensate. But they’ve also encouraged more activity in residential investment property -- with prices up nearly 80 percent over the past 13 years.

Inflation Hedge

Swiss Life Holding AG, the country’s biggest private property owner, has boosted its real estate exposure, primarily with acquisitions in the center of larger Swiss cities. Renato Piffaretti, its head of real estate for Switzerland, said the investments provide “constant, predictable cash flow” and a hedge against inflation.

The proportion of real estate in pension fund portfolios has risen over the past five years, according to asset manager Swisscanto, making them overly exposed to a market downturn.

Both UBS and Credit Suisse, Switzerland’s two biggest banks, say negative rates have dragged on profits. They squeeze the margins from customer deposits and loans, according to UBS wealth management chief Martin Blessing.

Concerned about residential investment property risks, SNB officials this month urged the government to take action. But measures such as loan-to-value ratio restrictions may not do much because the major players aren’t borrowing to buy.

According to Credit Suisse economist Claude Maurer, if the central bank is really concerned, the only solution is ending negative rates.

“Typical regulatory measures target debt-financed business and this is self financed,” he said. “So interest rates are the most important lever.”

--With assistance from Patrick Winters and Jan-Henrik Förster.

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, Iain Rogers

©2018 Bloomberg L.P.