Swiss National Bank indicates negative rates to stay for long haul

BERN (Reuters) - The Swiss National Bank remains wedded to its ultra-expansive monetary policy, indicating on Thursday that its negative interest rates would remain in place for the foreseeable future despite rising criticism in Switzerland.

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The SNB left its policy rate at -0.75%, as expected by all analysts in a Reuters poll. It also maintained the rate it charges on commercial banks’ sight deposits at -0.75%.

The central bank pledged to remain active in the currency markets to ease upward pressure on the franc, which has gained 3% in value against the euro EURCHF= this year.

The SNB continued to describe the franc as “highly valued,” as predicted in the poll, and described the foreign-exchange situation as “fragile.”

SNB Chairman Thomas Jordan defended the bank’s negative rates, which have been locked in place for nearly five years, saying they remained central to the bank’s monetary policy.

“Without it, the franc would have been significantly stronger in recent years, which would have been highly detrimental to the Swiss economy and would have jeopardized price stability,” Jordan told a news conference.

“We remain convinced that the benefits it brings Switzerland clearly outweigh the costs.”

Swiss banks have criticized negative rates, which squeeze margins they earn from lending and cost banks nearly 1.7 billion Swiss francs ($1.7 billion) in the first nine months of 2019.

Several Swiss banks, including UBS UBSG.S, Credit Suisse CSGN.S and Julius Baer BAER.S, have passed on the cost of negative rates to rich customers, triggering an outcry from the Swiss Bankers Association. The group said the charge punished savers and damaged the country's pension system.

The SNB this year raised the exemption threshold before the negative rates apply, aiming to relieve the burden on banks.

Jordan noted that the low interest rate environment had become more entrenched during 2019, suggesting that it was harder for the SNB to change course.

With subdued inflation and the European Central Bank and the U.S. Federal Reserve in rate-cutting mood, the SNB has little room to raise its own rates for fear of making the safe-haven franc more attractive to investors.

The SNB downgraded inflation expectations for 2020 and 2021 on Thursday. Consequently, analysts said they did not expect any increase in rates in the foreseeable future.

“In keeping its conditional inflation forecast visibly below 2% over its entire forecast horizon, the SNB is clearly signaling its intention to keep its policy rate unchanged for a prolonged period of time,” said Maxime Botteron, an economist at Credit Suisse.

“We expect the SNB to keep its policy rate unchanged at least over the next two years.”

Reporting by John Revill; editing by Larry King