UBS Urges Swiss Fiscal Policy Rethink Due to Negative Rates

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Switzerland's negative central bank policy rate that allows the government to get paid to borrow money “inevitably raises the question” whether fiscal policy isn't too restrictive, according to UBS Group AG.

Switzerland has a low debt-to-output ratio, with a constitutionally guaranteed debt break meant to prevent out-of-control spending. The burden of keeping the economy on track falls on the Swiss National Bank, which aims prevent an undue appreciation of the franc.

“Monetary policy is slowly but surely reaching its limits, so it's increasingly uncertain whether an even lower policy rate or even more interventions actually move the external value of the franc in the right direction,” UBS economist Alessandro Bee said in a note.

“For infrastructure projects or tax cuts, there is significantly more certainty that this will also have an effect.”

The International Monetary Fund has chided the country for unnecessary frugality, warning that a failure to spend could crimp potential growth down the road.

Yet Swiss officials say infrastructure is already in good shape, and more domestic spending won't weaken the exchange rate, which is the reason the inflation rate is so weak.

Read More: Swiss Can Cut Rates More But Also Need Fiscal Action, IMF Says

According to Bee at UBS, while monetary policy is likely to remain the dominant player for now, in the longer term the Swiss will need to rethink the policy mix.

“The most justifiable is taking on more debt for infrastructure projects, which wouldn't endanger the public sector's AAA rating,” he said. “However, the debt break would have to be modified for that.”

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Alaa Shahine

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