A negative savings interest rate is quickly approaching here

In Switzerland, savers must once again fear negative interest rates. The central bank is trying to curb the popularity of the franc with its interest rate policy. However, this is only moderately successful, much to the dismay of Rolex and other luxury brands.

The savings interest rate seems to be on a sharp downward spiral again. NN Group recently lowered the rate for amounts up to €25.000 from 2% to 1,75%. For the time being, savers do not have to worry about having to pay negative interest to park their savings somewhere. In Switzerland, that risk is much greater. The Swiss National Bank (SNB) lowered the policy rate by 0,5 percentage points to 0,5% a few weeks before New Year's Eve. That interest rate step was much greater than economists had anticipated. It could well be that the interest rate will drop below zero in the second half of the year. If temperatures in Switzerland also drop below zero, that bank policy could work out well for winter sports enthusiasts.

Pulling down your own currency
A low interest rate makes it less attractive for parties to park their assets in a Swiss account. Incidentally, that is also one of the reasons why the SNB chooses to lower the policy rate much faster and further than, for example, the European Central Bank (ECB). At the moment, the most important rate on the European mainland is just over 3% and at the ECB meeting at the end of this month, that will probably only be reduced by 0,25 percentage points. Incidentally, it is nothing new that the Swiss central bank tries to pull down the value of its own currency with its interest rate policy. That is much easier than trying to artificially put a brake on increases in the franc.

Strong price movement
The SNB abandoned that strategy almost exactly ten years ago. On 15 January 2015, the central bank announced that the fixed lower limit of the euro/franc exchange rate of 1,20 would be abandoned. As a result, the Swiss currency shot up and even became more valuable than the euro. The exchange rate movement was so violent that some banks suffered losses of millions. Currency broker Alpari UK even went under. That was big news at the time, because the company was, among other things, the shirt sponsor of the Premier League football club West Ham United. After a correction in the following years, the franc started a new upward trend in April 2018. The value of the currency has since risen from 83 euro cents to €1,06. In other words: the exchange rate effect alone made a winter sports holiday in Switzerland 28% more expensive.

Safe haven
By cutting the policy rate towards – and perhaps even below – zero, the SNB wants to put an end to this rise. The strong currency makes it difficult for Swiss companies to operate on international markets. Last autumn, a number of well-known watch brands, among others, called on the SNB to stop the rise of the franc. However, the low inflation of only 0,6% leaves plenty of room for further interest rate cuts. On currency markets, however, rates are determined by more factors than just interest rate differentials. The Swiss franc is known as a safe haven in uncertain times. It is precisely this status that has made the currency quite popular recently. If Donald Trump continues to stoke the fires under geopolitical unrest, this will not change in 2025, much to the SNB's dismay.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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