Swiss National Bank's Maechler says negative interest rates vital

ZURICH (Reuters) - Negative interest rates remain “absolutely necessary” for Switzerland, Swiss National Bank governing board member Andrea Maechler said on Wednesday, as pressure mounts on the central bank to change course from its ultra-expansive monetary policy.

The Swiss franc remains “highly valued” with the currency sought by investors as a safe haven investment in an uncertain environment, Maechler said in the last public appearance of a policymaker before the SNB’s quarterly rates review on Dec. 12.

“Negative interest rates remain absolutely necessary for Switzerland,” Maechler told an event in Zurich, describing one of the tools the SNB has used to dampen demand for the franc.

The SNB’s policy, based on a negative rates of -0.75% and a readiness to intervene in the currency markets, is needed to achieve its goal of price stability and supporting the Swiss economy, she said.

“Price stability is a precondition for a company to invest, they know what prices they can expect,” Maechler said. “Price stability is an extremely important factor for growth and prosperity in an economy.”

It was crucial to keep a gap between Swiss rates and those elsewhere, she said.

But the negative rate policy, in place for nearly five years, has triggered increasing opposition in Switzerland, particularly from the financial sector.

The Swiss Bankers’ Association has blasted the measure, saying it creates asset bubbles and put pressure on banks by costing them nearly 2 billion Swiss francs ($2.02 billion) last year.

UBS UBSG.S, the country's biggest lender, has also weighed in, with its Chief Executive Sergio Ermotti telling an event last week "they don't work as a permanent fix."

Rudolf Sigg, Chief Financial Officer of Zuercher Kantonal Bank, said the negative side effects of the SNB’s policy were becoming increasingly apparent.

“As a result of the prolonged low interest rate environment, the interest margin of Swiss banks continues to decline,” he said.

But manufacturers, wary of a strong franc damaging exports, have defended the SNB’s policy.

Juerg Werner, chief executive of household-appliance maker Metall Zug METN.S, called negative rates a "necessary evil."

“Without them the franc would be much stronger, which wouldn’t be good for industry,” he said.

The market is pricing in a 95% probability the SNB will stick to its policy rate of -0.75% at its next meeting.

With the European Central Bank cutting rates and with political risks expected to continue, many observers expect the SNB’s next move to be another cut.

“We expect the franc to rise next year, so the next interest rate move by the SNB will most probably be down,” said David Oxley from Capital Economics. “The SNB is not happy doing this, but I don’t see it having many other options.”

(This story fixes typo)