SNB set to reduce interest rates payments

The Swiss National Bank (SNB) has declared its intention to reduce the interest rates it pays to commercial banks for funds deposited with it overnight. This move comes as a response to the escalating costs that have arisen with the cessation of its negative-rate policy and its efforts to curb the appreciation of the Swiss franc, considered a safe-haven currency. Here are the significant aspects of the SNB’s announcement:

The SNB has terminated its almost eight-year practice of imposing negative interest rates, which mandated commercial banks to pay fees for holding cash with the central bank overnight. This marked a reversal of the negative interest rate policy.

The SNB will now be making reduced interest payments to banks. In the first half of 2023, it disbursed 3.3 billion Swiss francs ($3.66 billion) in interest on sight deposits. Commencing from December 1, 2023, sight deposits held for the purpose of fulfilling minimum reserve requirements will no longer receive any remuneration.

Under the new structure, banks will receive payment at the SNB’s current policy rate, which stands at 1.75%, on deposits equivalent to 25 times their minimum reserve requirements, a decrease from the previous rate of 28 times. Sight deposits that surpass a bank’s individual threshold will be subject to the SNB’s policy rate, with a 0.5 percentage point discount.

The SNB has emphasised that these alterations do not impact the current stance of monetary policy. The adjustments are intended to ensure the effective execution of monetary policy while lowering interest costs incurred by the SNB.

Although the SNB has not specified the precise amount of savings it anticipates, it did report a loss of 1 billion Swiss francs on its Swiss positions in the previous year. This was attributed to the shift to positive interest rates, which led to higher payouts compared to the income generated from the earlier practice of negative overnight rates.

For the entire year of 2022, the SNB recorded a significant loss of 132.5 billion Swiss francs, primarily resulting from losses incurred in its foreign currency investments.

Previously, the SNB had mainly used sight deposits to conduct foreign currency transactions with the aim of controlling the strength of the Swiss franc, considered a safe-haven currency. This involved crediting the local currency accounts of commercial banks with newly created Swiss francs in exchange for foreign currencies. The size of sight deposits had substantially increased but had been diminishing in recent months.

These changes illustrate the SNB’s response to evolving economic conditions and its endeavours to manage the exchange rate of the Swiss franc and ensure the effective implementation of monetary policy.