Negative Interest Rates In

Switzerland:
What have we learned?
Jean-Pierre Danthine
Paris School of Economics and CEPR
Asian Development Bank Institute 19th Annual Conference
1 2 December, 2016, Tokyo, Japan

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development
Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences
of their use. Terminology used may not necessarily be consistent with ADB official terms.
 The ZLB and SOEs
The interest rates dual role in SOEs (small open economies)
A critical intertemporal price
The key policy lever determining the exchange rate

In theory, makes the ZLB (zero lower bound) particularly relevant

In practice, many SOEs are less constrained because of positive risk
premium
Exception: a SOE with a safe haven currency, where risk premium is
negative, e.g., Switzerland

JP Danthine - Negative Interest Rates in Switzerland 2

 The CHF- Euro interest rate differential
6

0
2000 2001 2002 2003 2004 2005 2006 2007 2008

Libor - CHF - 3 m Libor - EUR - 3 m

JP Danthine - Negative Interest Rates in Switzerland 3

 Financial crisis = collapsed interest rate
differential (euro)

~1.8-2.2%

0.05-0.25%

Sources: BNS, Bloomberg

4 6/13/16 JP Danthine - Negative Interest Rates and Monetary Policy
The consequence: a massively overvalued
currency

Peak: 9 Aug 2011:

~+38%

5
 Negative rates: the new normal?
The Exchange rate floor (9/6/2011 1/15/2015): an extraordinary
policy for extraordinary times
Jan 15, 2015 = back to normal = relying on interest differential
With Euro rates at (below) zero: -75BP is not enough
Discretionary FX interventions are a necessary complement
...for a limited time period
What if secular stagnation?

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 Negative rates Swiss made
Low negative: -75BP
Large exemptions: 20 times required reserves average rate < 30bp
The ZLB remains for retail depositors
Banks fear severing profitable client relationships (given the unpopularity of
negative rates)
They can afford to do it because of large exemptions
No paper currency hoarding risk at retail level
Market rates are affected Interest rate differential plays its part on
ER
No transmission to bank lending rates No monetary stimulus

JP Danthine - Negative Interest Rates in Switzerland 7

 Swiss Confederation Bond Yields
2

1.5

0.5

-0.5

-1

-1.5

CHF Obligations de la Confdration - 1 an CHF Obligations de la Confdration - 5 ans

CHF Obligations de la Confdration - 10 ans CHF Obligations de la Confdration - 30 ans

JP Danthine - Negative Interest Rates in Switzerland 8

Bank lending rates New loan agreements
Interest rates on new loan agreements
2.4

2.2

1.8

1.6

1.4

1.2

1
2014-01 2014-02 2014-03 2014-04 2014-05 2014-06 2014-07 2014-08 2014-09 2014-10 2014-11 2014-12 2015-01 2015-02 2015-03 2015-04 2015-05 2015-06 2015-07 2015-08 2015-09 2015-10 2015-11 2015-12

Maturity of over 1 month up to 6 months Maturity of over 6 months up to 1 year Maturity of over 5 years up to 7 years

JP Danthine - Negative Interest Rates in Switzerland 9

 Mortgage and investment loan rates
3 Mortgages and Investment loans rates

2.5

1.5

0.5

Fixed rate mortgages > 1 to 6mth Fixed rate mortgages > 5 to 7 yrs

Fixed rate mortgages > 10 to 15 yrs Variable rate mortgages (linked to base point) > 5 to 7 yrs

Fixed rate investment loans > 1 to 6mth Fixed rate investment loans > 5 to 7 yrs

JP Danthine - Negative Interest Rates in Switzerland 10

 Negative rates: what next step?
More deeply negative? How?
Consolidate current policy:
Levying a fee on cash withdrawals at the central bank to discourage
wholesale paper currency hoarding
Increasing exemptions to stabilize the burden on the banking system
(but monitoring remains required)
(If needed) strengthen the ZLB for retail depositors by imposing a zero
minimum rate (as in Belgium)

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 Negative rates light
Reaches the goal for a SOE in need of an appropriate interest rate
differential to stabilize its ER
Not in the case of an economy in need of a classical monetary
stimulus

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 Unencumbering monetary policy?
Two radical options
Abolish paper currency (Buiter, Rogoff)
Introduce an exchange rate between paper currency and electronic money
and insure the rate of return implicit in the depreciating exchange rate
matches the negative interest on electronic money
Not democratically feasible : negative rates are very unpopular
Savers feel expropriated low rates are the problem
Pension fund managers are fierce contradictors
Exemption thresholds are seen as unfair
Beware of technocratic advances without democratic support!
Who does the PR?
JP Danthine - Negative Interest Rates in Switzerland 13
 Conclusions
The interest rate unbound? Not yet!
A full monetary stimulus below zero requires radical solutions
Beware of democratic deficits!
More negative rates to restore a needed interest rate differential may
be within reach
Is anyone interested but the Swiss?

JP Danthine - Negative Interest Rates in Switzerland 14