Real negative interest rates are easy to imagine when inflation is higher than the interest rate. But nominal negative interest rates have long been thought of as either inconceivable or unsustainable. Yet, in recent years, several European countries and Japan have made negative nominal interest rates a reality. The most extreme case seems to be Switzerland, which is featured in the top graph: The spot rate, the 3-month LIBOR, and even the 10-year government bond rate are all negative now and have been for several years. How is this possible?
This isn’t a case of an economy that needs major stimulus through low interest rates. Rather, it’s an export-focused economy whose currency has a strong tendency to appreciate; in fact, the Swiss franc is considered a refuge currency in times of crisis. The crisis at hand involves the euro’s various troubles in recent years, including the debt problems of some of its member countries. Switzerland has avoided these troubles and has even managed to achieve successive government surpluses. So it’s easy to understand why there’s so much demand for Swiss francs and bonds. But so much demand typically causes a local currency to appreciate, which would make exporting more difficult. The Swiss National Bank, therefore, has adopted a policy of negative interest rates to make the franc less attractive. Interestingly, the effect permeates the Eurodollar market as well, as shown in the bottom graph.
How these graphs were created: NOTE: Data series used in these graphs have been removed from the FRED database, so the instructions for creating the graphs are no longer valid. The graphs were also changed to static images.
Today is Switzerland’s national holiday, and of course FRED has Swiss data, which can be especially interesting because the Swiss economy is in many ways out of the ordinary. Previous FRED Blog posts have discussed the “peculiar” Swiss unemployment rate as well as its negative interest rates. In fact, as of today, the Swiss 50-year government bond has a negative nominal yield.
Today we look at the Swiss exchange rate. The graph shows in green the exchange rate of the Swiss franc with the euro, including a dramatic change on January 15, 2015. Unlike other countries’ exchange rate troubles, this event is actually an appreciation of the Swiss franc. Swiss franc appreciation is bad for exports, which Switzerland depends on. Because the franc has long been viewed as a refuge currency when economic trouble brews in Europe or elsewhere, it has been under a lot of appreciation pressure for some time. The Swiss National Bank has tried to cap the exchange rate at 1.20 for some time, flooding the currency markets with francs in exchange for euros and other assets. This sounds like a dream come true for any central banker: print money at will without negative consequences. Yet, this environment was unsustainable and, on January 15, 2015, the SNB decided to stop managing the exchange rate. The franc appreciated by about 20% almost immediately, and LIBOR interest rates dropped deep into negative territory. The graph shows the 3-month LIBOR in red.
How this graph was created: NOTE: Data series used in this graph have been removed from the FRED database, so the instructions for creating the graph are no longer valid. The graph was also changed to a static image.