The Currency Wars are now besieging Switzerland as it imposes negative interest-rates

The world is an incongruous place right now and a clear example of this has been given to us by the central planners over the past 24 hours. It was only yesterday that I was discussing the machinations and activities of the Bank of Russia. Since then there has been an extraordinary rally in Russian assets ahead of the speech by President Putin which is just starting as I type this. For example 59 Roubles buy one US Dollar though by the time you read this it could be almost anywhere but how long can Russia keep this up? However the real incongruity has come from the central banks of the United States and Switzerland.

The US Federal Reserve

The statement last night contained something of a change.

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.

This was backed up by the way that the current phase of lower oil prices was treated and the emphasis is mine.

The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

At this point the message was looking surprisingly hawkish as if you really believe the oil price effect is temporary you might look through it and raise interest-rates. I found this odd when earlier in the day we had been told this.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.3 percent in November on a seasonally adjusted basis.

Whilst the Federal Reserve does not target this index there is a hint in the fall in the annual rate to 1.3% and of course if oil stays at current levels more is to come.

Then in her press conference Janet Yellen moved us away from the expectations the statement had created.

This new language does not represent a change in our policy intentions………..unlikely to begin the normalization progress for at least the next couple of meetings.

Accordingly I was left with the impression that the Federal Reserve wants people to think that it will raise US interest-rates in the middle of 2015 but wants to have pre-planned excuses ready should it not do so. We may find that interest-rate rises remain just over the horizon as time passes, especially if consumer inflation heads lower.

But let us move on remembering that the US Federal Reserve wants us to think it is planning to raise interest-rates in 2015.


Completely the opposite view has come this morning from the Swiss National Bank.

The Swiss National Bank (SNB) is imposing an interest rate of –0.25% on sight deposit account balances at the SNB, with the aim of taking the three-month Libor into negative

Negative interest will be charged as of 22 January 2015 until further notice.

Negative interest is charged only on the portion of the sight deposit account balance which exceeds a certain threshold.
The exemption threshold applies to each individual account holder and shall be at least CHF 10 million.

So if you wish to deposit larger sums with the SNB you will soon have to pay to do so. You may note how interest-rate cuts have a specific date for introduction whilst interest-rate rises are invariably just around the corner. In the press conference we were left in no doubt whether the SNB intended this to spread to the banking-sector or not?

H/T expects banks to pass on negative rates to big consumers

As King Theoden says in the Lord of the Rings

And so it begins….

The press conference also gave us hints that the measure could be strengthened in terms of the size of funds subject to negative interest-rates and the rate itself.

What has been the cause of this?

The SNB has revealed this morning that in recent times it has found itself having to intervene to reduce the upwards pressure on the Swiss Franc. For those unaware of the state of play the SNB put a cap on the level of the Swiss Franc against the Euro back in September 2011 which is referred too below.

The SNB reaffirms its commitment to the minimum exchange rate of CHF 1.20 per euro, and will continue to enforce it with the utmost determination.

It has promised “unlimited intervention” which makes me wonder how many Swiss Francs it has found itself selling recently? If it had only undertaken minor interventions why take the plunge into negative interest-rates?

 Against this background, we were obliged to ensure the minimum exchange rate of CHF 1.20 per euro by
intervening on the foreign exchange market

The statement was a little vague as to the cause but the press conference then told us what I am sure that many of you were expecting to read and the emphasis is mine.

Over the past few days, a number of factors have prompted increased demand for safe investments.

Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development.

The number of factor seemed to have shrunk to just one! I had already been using Twitter to disseminate this message.

I think that we can safely assume from the actions of the that Rubles were pouring into Swiss Francs don’t you? .

Just a thought about timing!

January the 22nd 2015 is the date of the next European Central Bank policy meeting. An interesting day to choose don’t you think?!

How did we get here?

This has been a long road involving the carry trade and foreign currency mortgages in Eastern Europe in the vein of oh what a tangled web and all that. Just under four years ago I explained the state of play.

Switzerland has been struggling with these issues ever since as various countries in Eastern Europe and beyond look over its shoulder. Not only are those with foreign currency borrowings in Hungary,Poland and beyond justifiably nervous right now but taxpayers in places like Austria and Italy should be nervous about their banks which lent much of the money.

Added to this dish has come a side plate of Russian crisis.


This has been a very bad 24 hours for the central planners as crisis after crisis shows them up as inflexible monoliths just as flexibility is required. I believe that the hype from the US Federal Reserve about higher interest-rates was exposed extremely quickly by the imposition of negative interest-rates by the SNB. It is quite noticeable that up involves talk and down involves reality and action for interest-rates.

Also the pronunciations from central bankers about a “lower bound” for interest-rates are being exposed. The most extreme case of this has been Bank of England Governor Mark Carney who keeps repeating a mantra that 0.5% Base Rates are a lower bound. That looked silly as the ECB imposed a negative interest-rate and looks even sillier as the SNB has undercut it and gone to -0.25%.

Meanwhile back in the UK we see that disinflation and deflation do not have to come together if I may borrow the lyrics of John Lennon.

In November 2014, the quantity bought increased by 6.4% compared with November 2013. This was the highest year-on-year increase since May 2004 when it grew by 6.9%.

Average store prices fell by 2.0% in November 2014 compared with November 2013, this was the largest fall since August 2002 when prices also fell by 2.0%

I will be on Share Radio after the 1pm news to discuss these matters and anything else which pops up between now and then.


6 thoughts on “The Currency Wars are now besieging Switzerland as it imposes negative interest-rates

  1. Hi Shaun, Your observation re the November retail figures is interesting. The much hyped Black Friday went mainstream in the UK this year-but does this mean some of the Christmas spending has been brought forward to take advantage of cheaper goods? The numbers would seem back this up. I don’t think the effect of lower petrol prices should be underestimated. This combined with lower mortgage interest rates are helping a chunk of the population have a bit more of a spending spree this year. Excellent timing for the forthcoming election! Not sure if any of this is sustainable though.

    • Hi Sarah

      It is possible that some of the spending in November this year was because of the Black Friday phenomenon.

      “. Estimates for November 2014 included the
      phenomenon ‘Black Friday’ however it was not included in the November 2013 reporting period.”

      However the pattern for solid retail sales growth has been with us for 20 months now so it would be quite a change for it to reverse. As to the impact of lower prices for petrol/diesel I can only agree! Perhaps we can shame the domestic fuel companies to join in?

      It may be good election timing in retail sales but the housing market seems to have peaked somewhat early.

  2. The question has to be, “One-off, or trail-blazing?”
    If it’s the latter, how quickly will we see the thresholds plummet?

    • No doubt Shaun may decide to contradict me but Switzerland is a “special case” – this is the latest tool they’re using to defend the Swiss Franc against appreciation. I guess Shaun uses the Fed as the opposite example as it too is now faced with an appreciating currency (albeit nowhere near the scale of the Swissy) yet the Fed does “nothing” other than delay rate rises, possibly suggesting it will try cuts but I doubt it as the Fed is using all sorts of other tools at it’s disposal.

      The UK isn’t troubled with an appreciating currency currently so the question doesn’t arise but if the £ does appreciate you may rely that the UK establishment will simply copy the worst policies they can find globally as has nearly always been the case (Japan??).

    • Hi therrawbuzzin

      The SNB and indeed the Swiss people are hoping that this is a one-off and also that it will not spread to more mainstream (as in retail) banking. Before they move deeper into negative interest-rate territory I would expect them to widen the impact i.e move it into mainstream banking. the problem that they face is that the Russian crisis has seen heavy Rouble falls and a 0.25% a year cut may seem a small blip. So should things worsen further we could see more cuts and if they do so in the short-term the SNB may regret not applying it until January 22nd.

  3. As you say, the US Fed doesn’t target the CPI-U, and November estimates for the PCEPI haven’t been published yet. The economic projections that were released yesterday were consistent with what Chair Yellen said that the Fed believed the impact of the oil price drop would not be long-lived. The 2015 forecast range for PCE inflation was revised from 1.6% to 1.9% in September to 1.0% to 1.6%, but the 2016 and 2017 forecast ranges weren’t changed at all, and in both years 2.0% was the upper bound.
    In addition to oil prices falling there has been a big disinflation in house prices. The annual growth rate of the 20-city composite Case-Shiller house price index peaked at 13.7% in November 2013, but in September 2014 it was only 4.9%, and Zillow Research has forecast a drop to 4.3% in October. However, the dysfunctional PCEPI is quite insensitive to house prices since it uses a rental equivalence approach to measure owner-occupied housing. (Think of it as the UK CPIH with a superior chain Fisher index formula.) Just as it ignored the acceleration in house price inflation in 2012 and 2013, it will ignore the disinflation in house prices going forward.

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