(MENAFN- The Peninsula) Switzerland's central bank said yesterday it would introduce negative interest rates for the first time in decades to stop the franc getting any stronger, after the Russian rouble crisis sent investors scurrying to the safe haven currency.
The Swiss National Bank will impose a rate of -0.25 percent on certain bank deposits on January 22, with the aim of pushing the target range of Switzerland's benchmark interest rate into negative territory.
"The Swiss franc has been experiencing renewed upward pressure vis-Ã -vis the euro in the last few days," said Thomas Jordan, chairman of the SNB governing board. "Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development." The rouble crashed to historic lows this week of 80 to the dollar and 100 to the euro, as the energy-export dependent economy was hit by a rout in oil prices.
With the safe haven Swiss currency in demand, the SNB was forced to take action to protect the country's vital export sector.
The negative interest rate will be imposed on so-called sight deposits, funds which can be accessed immediately, but only apply to balances above a certain threshold.
The measure will have the effect of taking the three-month Libor rate, which Switzerland uses to determine interest rates on mortgages and savings accounts, into negative territory.
The target range for Libor -the franc's three-month London interbank offered rate - is now between -0.75 percent and 0.25 percent, compared to its previous level of between 0.0 and 0.25 percent. "This measure will lead to a further decline in the interest earned on Swiss-franc investments, making them less attractive, and thereby easing the upward pressure on the Swiss franc," Jordan said.
He reiterated the central bank's "utmost determination" to keep to an exchange-rate floor of 1.20 francs to the euro - a move that effectively imposes a limit on how strong the Swiss currency can get. "Without the minimum exchange rate, price stability in Switzerland would be seriously compromised," Jordan said.
He confirmed the bank was prepared to buy foreign currency "in unlimited quantities" if needed.
The wealthy nation also turned to negative interest rates in the 1970s, as it desperately tried to ward off pressure on the franc amid soaring global inflation.
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