Zurich: The Swiss National Bank surprised markets on Thursday by introducing a negative interest rate on sight deposit account balances, seeking to discourage safe-haven buying by investors anxious over the crisis in Russia and oil's slide.
In a brief statement, the SNB said it would impose an interest rate of -0.25 per cent on sight deposit account balances of over 10 million Swiss francs and expand its three-month Libor target range to -0.75 per cent to 0.25 per cent.
The franc fell after the announcement to its lowest against the euro since mid-October and to its weakest against the US dollar since May 2013.
"Over the past few days, a number of factors have prompted increased demand for safe investments," the SNB said in its statement. "The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate."
Commercial banks held 313 billion Swiss francs in sight deposits with the SNB at the end of last week.
The central bank also stressed its determination to defend its cap of 1.20 per euro for the franc, which it set at the height of the euro zone crisis in 2011 and said remained its key policy tool.
Analysts said the SNB's action should temporarily ease selling pressure on the euro against the franc.
"However, more steps will certainly be needed to defend the floor if the ECB moves toward a full-blown quantitative easing by the first quarter of 2015," Swissquote analyst Ipek Ozkardeskaya said. "This is just a beginning, there is certainly more to come."
Expectations that the European Central Bank will launch a full-blown quantitative easing programme early next year have prompted the franc to stick close to its 1.20 per euro limit in recent months, putting pressure on the SNB.
Copyright: Thomson Reuters 2014
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