IMF Thinks SNB Should Use Negative Rates, If Franc Jumps Up

According to the International Monetary Fund, the Swiss National Bank should start to charge banks on extra reserves if the Swiss Franc increases against Euro. At a news conference in Bern, the Mission Chief of IMF, Enrica Detragiache stated that in case of any type of renewed appreciation pressures, SNB should be introducing negative interest rates on the additional bank reserves. Incidentally, the Alternate Governing Body Member of SNB, Thomas Moser acknowledged that the suggestion by IMF is definitely an option for them.

As the news surfaced, Franc’s gains over Euro erased and it dropped to 1.2289. However, at later point of time on the day, it was able to rise slightly and was trading at 1.2220. Incidentally, on today, Euro experienced a huge fall as the news of Cyprus bailout came out.

In September, 2011, SNB implemented a ceiling on Swiss Franc of 1.20 per Euro, in an attempt to help the exporters and fend off deflation after surging towards the parity with this shared currency. The cap was confirmed by the Central Bank on last week and it decided to keep the band for the benchmark interest rate at 0%-0.25%.

According to IMF, this cap should be maintained because of the risks from the Euro-area debt crisis. It also advised SNB to keep it as long as inflationary risks don’t start being visible. At a joint briefing with SNB, Thomas Moser welcomed the Washington based lender’s judgment and clearly stated that they will analyze the possible outcomes of the negative interest rate implementation very soon.

As far as Peter Rosenstreich, the Chief Foreign Exchange Analyst of Swissquote Bank is concerned; this backing from IMF is expected to strengthen the position of Swiss Central Bank further. Peter added that because of IMF, Swiss Bank’s credibility increased as it sort of validated the current policy undertaken by the bank.

In an attempt to defend the cap, more than $199 billion was spent by the SNB in 2012. Apart from that, the President of SNB, Thomas Jordan, on last week, stated that the bank is ready to buy foreign currencies in unlimited amounts for maintaining the cap. Incidentally, the current reserve of SNB is almost 3 times of the annual output of Switzerland. Well, because of its low Government debt, Switzerland was affected less in the 2008 financial crisis.