Central bank keeps negative rates in place

Switzerland’s central bank on Thursday left its monetary policy unchanged, keeping negative interest rates of 0.75 percent in place on large deposits.

Central bank keeps negative rates in place
Photo: The Local

The Swiss National Bank said in a statement that is was leaving its target rate for the three-month Libor — the borrowing rate paid by banks — unchanged between minus 1.25 and minus 0.25 percent.

The central bank said it would also intervene in foreign exchange markets “as necessary” to ease upward pressure on the franc, which is “still significantly overvalued, despite a slight depreciation”.

The euro edged up above 1.095 francs in Thursday morning trading on FX markets after the SNB announcement, but remained significantly below the 1.20 floor supported by the central bank for more than three years until January.

After flirting with parity against the euro the franc has backed off slightly but its relative strength still poses a challenge for Swiss companies exporting to customers in the euro zone.

The central bank noted that its policy of negative interest rates and its willingness to intervene in the foreign exchange market make investments in Swiss francs less attractive, thus reducing upward pressure on the currency.

The franc is seen as a safe haven currency that rises in value in times of uncertainty.

The SNB said the agreement of a new bailout programme for Greece has soothed concerns about that country’s debt crisis but concerns have recently emerged about developments in China, where stocks have fallen.

The SNB said it expected negative inflation in Switzerland for the next two years (minus 1.2 percent this year and 0.5 percent in 2016) before turning positive in 2017.

Against a background of moderate global economic growth, the central banks said it expects the Swiss economy to pick up in the second half of the year after stagnating for the first six months, supported by domestic demand.

“If the international environment continues to improve and the overvaluation of the Swiss franc eases, exports should once again make a greater contribution to economic growth”.

The SNB expects the economy to grow by about one percent in 2015. 

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Why is the demand for 1,000-franc banknotes growing in Switzerland?

Large-denomination banknotes, like the 1,000-franc note, are rarely used for everyday transactions in Switzerland. So why are they becoming more popular?

Why is the demand for 1,000-franc banknotes growing in Switzerland?
The kind of banknotes the Swiss like to stash away. Photo by AFP

The demand for 1,000-franc notes has risen in the past months, data from the Swiss National Bank (SNB) indicates.

CHF1,000 converts to approximately €925.75, £824,63 or $US1126.98. 

Whether withdrawing the money from an ATM machine or directly from a bank, customers request large-bill denominations more often than before.

“We do know there is more cash being currently withdrawn in large notes, but it changes hands less often” Sarah Lein, a monetary policy expert from the University of Basel told SRF public broadcaster.

This means the money is not being spent but stashed away.

“We can conclude that some large notes end up in a safe”, she added.

READ MORE: Switzerland’s economy forecast to recover 'from summer onwards' 

The reason, she said, is that many banks charge their customers negative interests on large deposits.

“Therefore, it could be cheaper to simply withdraw the cash in large notes and keep it in a safe, especially since inflation has been extremely low for a long time”, Lein added.

This is not unusual — in times of crisis, more cash is often in demand.

But could this cause the shortage of 1,000-franc bills?

That is not likely to happen, Lein pointed out.

“Both the central and commercial banks have enough cash stored in their vaults to meet such demand. So there is always enough money available”, she said.

There is about 48.6 billion francs floating around in the form of 1,000-franc notes, constituting 59 percent of all Swiss notes in circulation. 

It is the world’s second-largest denomination after Brunei's B$10,000 note.

READ MORE: What do people in Switzerland spend their money on?