Swiss National Bank Lowers Overnight Deposit Rates to Manage Rising Interest Expenses, Reports Reuters

By John Revill

ZURICH – The Swiss National Bank is poised to decrease the interest it pays commercial banks for overnight cash deposits. This announcement comes as the central bank aims to manage rising costs associated with its transition from negative interest rates to positive ones, shifting its focus to combating inflation.

In the first half of 2023, the SNB paid out 3.3 billion Swiss francs in interest on these sight deposits, following a nearly eight-year period where banks were charged to hold cash overnight.

Meanwhile, policymakers at the European Central Bank are also deliberating on similar reductions in interest payments to euro zone commercial banks early next year.

Effective December 1, the SNB will not remunerate sight deposits held to fulfill minimum reserve requirements. Additionally, banks will receive the SNB’s policy rate of 1.75% on deposits up to 25 times their minimum reserve requirements, reduced from 28 times. Interest on deposits exceeding a bank’s individual threshold will be set at 0.5 percentage points below the policy rate.

The SNB stated that these adjustments are necessary to maintain effective monetary policy implementation while also lowering its interest costs. They emphasized that these changes would not affect the current monetary policy stance.

Previously, banks had funneled 11.3 billion Swiss francs to the SNB during the negative rate phase, but that trend reversed when rates turned positive in September. Professor Yvan Lengwiler from the University of Basel noted that with positive interest rates now in effect, the cost of paying interest to banks has become a significant concern for the SNB.

The SNB currently holds a substantial amount in sight deposits for banks, totaling 472 billion francs. It has not provided specific estimates regarding the potential savings from these policy changes, but UBS economist Maxime Botteron suggested that the central bank could save around 700 million francs annually at the current policy rate. He added that with excess deposits earning lower interest, banks will be incentivized to increase lending in the money market, which could enhance overall economic activity and facilitate the flow of monetary policy.

Last year, the SNB experienced a loss of 1 billion francs on its Swiss franc holdings, as interest payments after the September rate increase surpassed earnings from the negative overnight rates earlier in the year. Overall, the SNB reported a total loss of 132.5 billion francs for 2022, mainly due to unfavorable outcomes on its foreign currency investments.

Stefan Gerlach, Chief Economist at EFG Bank, remarked on the political difficulties involved in maintaining interest payments to commercial banks while operating at a loss and foregoing profit transfers to the government, particularly in a climate where the interest paid to savers has been minimal.

The SNB historically utilized sight deposits for foreign currency transactions to help manage the strength of the Swiss franc, creating local currency accounts for banks in exchange for foreign currencies.