The Swiss National Bank set negative interest rates on Thursday on sight deposits to stem inflows of capital by investors seeking a safe haven for the current turmoil around the Ukraine crisis, Russian rouble rout and the falling oil price.
The negative interest rates – on short deposits and not on longer Swiss savings – create a penalty for hot money flowing into the small Alpine country that had boosted the Swiss franc beyond where the central bank wanted it to be.
Over the past few days, a number of factors have prompted increased demand
required.
for safe investments. The introduction of negative interest rates makes it less attractive to hold
Swiss franc investments, and thereby supports the minimum exchange rate. The SNB is
prepared to purchase foreign currency in unlimited quantities and to take further measures, if
Stability is key for the Swiss and they do not want the global community of currency investors upsetting centuries of prudent monetary policy. But the issue once again underscores the relative weakness of the Swiss franc in the power field of global currencies, as well as the lack of trust by investors in the euro.
The central bank's decision follows market rates into negative territory and was taken at a time of very low ECB rates and expectations of further easing by the European central bank.
The problem with the size, speed and volatility of today's market is that the tail is wagging the dog – while on the one hand the interest rates and currency exchange rates reflect the state of the underlying economy, in times of panic the hot money streams could work as powerful multipliers and undermine the underlying economies.
It is hard to fight the global capital markets, as the Russian central bank is discovering to its expense, but it is the duty of the central banks to blow the whistle in times of fouls.
This is such a situation – ruble, euro, Swiss franc are unhinged by political factors. Japan's expansion plan will add to the jitters.
Mistrust, safe haven buying at a time of recession and low inflation – the ingredients are there for a new financial crisis in 2015. Add the Greek elections to the mix and it is hard to be bullish.
But as many underlying reasons are political, it is time for political leaders to take their responsibility if they would like to get a nicely written passage in tomorrow's history books.
