This morning has seen the latest missive from the Swiss National Bank which reminds us that Switzerland is one of the leaders of the pack of the world of negative interest-rates. Before we do so we have two anniversaries to mark one of which is one of the events which led us into a world now containing so much negativity. Tracy Alloway has kindly reminded us of how the Financial Times reported it.
Do you work at Lehman? Did you hear Christian Meissner ( LEH’s co-head of investment banking in EMEA) tell you in a London meeting this morning that you are on your own and shouldn’t expect to be paid?
Because he did, apparently
Eight years ago for something which feels like yesterday! Also one hundred years ago in an actual war rather than a financial one some brave men climbed into their tanks and advanced on the enemy. Sometimes we do not realise how lucky we are.
Swiss National Bank
The state of play is as shown below.
Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%.
This is in one sense unchanged and in another a change. What I mean by that is the point which I have made before which is that banking systems have in general resisted some of the implications of negative interest-rates but cannot do that forever. So the longer they persist the harder it is for them to keep doing that. The clear example is that whilst we have seen negative interest-rates proliferate in wholesale and money markets they are a rarer beast in retail ones.
Also at the extreme this is the joint lowest negative interest-rate to be seen as one of the technical interest-rates at the Riksbank of Sweden is at -1.25% as well. However there is another feature of this as we need to look wider than the official interest-rate. In spite of the fact that we are currently seeing a “temper tantrum” for bonds and bond yields Switzerland issued a 9 1/2 year bond yesterday at a yield of -0.27% Yes they were paid to issue and anyone who holds to maturity is guaranteed a loss. Actually the last 4 bond issues have been at negative yields of which the most remarkable is the one in July at -0.02% because it was for 42 years. I do know about you but a 42 year bond at any negative yield seems to have an extraordinary level of risk to me! What could go wrong?
Interest-Rates for the ordinary person
You may be surprised at this and let me give you an example. According to the SNB the ordinary variable mortgage-rate is 2.81% and the one linked to a base rate is 1.14%. These have not fallen since the SNB plunged into an official negative interest-rate. Actually the base rate linked one is higher as it was 1.06% in December 2014. So we have low mortgage-rates but not the falls we might have expected. Oh and the overdraft rate has in fact risen from 4.84% to 5.02%.
What is that doing to the housing market? Well here is the official version.
While growth in real estate prices weakened overall in the second quarter, growth in mortgage lending was virtually unchanged compared to the previous quarter. According to the SNB’s assessment, imbalances on the mortgage and real estate markets persist.
Ah “imbalances”, how euphemistic!
I guess many of you are waiting for what deposit savings rates are and according to the SNB they were 0.01% in June. As to a change well if we look back three years we see that they were 0.05% so the official cuts have in fact not had much impact at all. So far banks have resisted making moves into negative savings rates. However they have dipped their toe into them for time deposits for larger deposits in the 3 month to one year maturity range which vary between -0.17% and -0.22%. You would get back less than you put in. I can think of two reasons why someone might do that. Firstly if you are a foreign investor expecting a stronger Swiss Franc and secondly if you think that the SNB will cut interest-rates further. If you think about it we would perhaps be seeing an example of retail investors joining institutional ones in front-running central banks.
The Swiss Franc
This was affected by the end of much of what was called the Carry Trade where investors borrowed Swiss Francs ( and Japanese Yen ) because it was cheap to do so. That feels like a different world but for example those taking out Swiss Franc mortgages in Eastern and Central Europe were able to do so at much lower interest-rates. This bust of the strategy meant that the Swiss Franc sang along to Jackie Wilson.
Higher and higher (higher)
The chart below shows what happened.
The period that looks flat is the one in which the Swiss National Bank put a cap on the value of the Swissy versus the Euro and then had to intervene on a grand scale to maintain it. In the end the rhetoric of “unlimited quantities for this purpose” was replaced by a retreat to occasional intervention and we heard more about that today.
At the same time, the SNB will remain active in the foreign exchange market, as necessary. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing upward pressure on the currency.
A consequence of all the foreign currency invention is that the SNB held some 603.7 billion Swiss Francs of foreign securities at the end of July. Just to give a comparison and also a hint at the intervention in the meantime – remember the assets are also revalued – if we go back two years the same number was 447.9 billion Swiss Francs. Also 20% of the assets are now equities as the SNB has been on something of a buying splurge of which because of its size and prominence has been its investment in Apple. I cannot imagine the Swiss watchmaking industry being ecstatic about their central bank investing in the manufacturers of the Apple Watch can you?
So far I have discussed the financial situation so let me now shift to the real economy. In spite of all the efforts and the negative interest-rate there is little sign of inflation according to the SNB.
For 2016, the inflation forecast remains unchanged at –0.4%. For 2017, the SNB expects inflation of 0.2%, compared to 0.3% forecast in the last quarter, while for 2018, the forecast has fallen from 0.9% to 0.6%.
In essence the commodity price falls and the exchange-rate have trumped interest-rate moves yet again. Also Switzerland has managed economic growth in spite of the overall higher exchange-rate.
In the second quarter, the Swiss economy posted growth of 2.5% on an annualised basis. Overall, the revised quarterly estimates for GDP suggest a somewhat stronger recovery of the Swiss economy since the middle of last year.
As ever you could argue that the drift lower in the Swiss Franc has had an impact as we note we so rarely get an absolutely clear picture.
So the prophets of doom were overall wrong I think as Switzerland has coped with a higher exchange-rate remarkably well in the circumstances. But the problem with all the central banking intervention and planning is how do you ever get out of it and can you do so before the side-effects and unintended consequences swamp the gains? What about a plunge in equity markets? This would also presumably push the Swissy higher yet again….