Some traders are still skeptical that Mr. Draghi will make much of a move at all, then any meaningful action by the ECB president could further hurt the EUR.
But we should watch out for local repercussions. The Swiss National Bank will not want to see the EUR below its CHF 1.20 minimum exchange rate target, so if that level is challenged, the SNB could introduce its own negative rates at the June 19th meeting.
Cutting its deposit rate below zero is potentially a more powerful policy for the SNB to weaken its currency than for the ECB.
Credit Suisse Group as mentioned in the past that it would begin charging other banks interest on CHF deposits. UBS, the country’s biggest lender by assets, also said it would charge fees on certain deposit accounts to discourage bank clients from parking cash. However, any measures have been implemented to date.
A strong lending growth also entails risks for financial stability. In the past, excessive growth in lending has often been the cause of later difficulties in the banking sector. Swiss real estate is feeling the effects of the SNB’s long policy of low interest rates with prices for owner-occupied apartments growing at an average rate of 6 percent per year since 2008, which could be a source of concerned.
If a central bank imposes a scenario of negative interest rates on excess reserves to the banking system, the cost of the interest will be ultimately passed along to deposit-holders (i.e. their saving customers), whether through fees or negative interest rates. Under normal conditions, depositors may be willing to pay a small fee for the convenience and security of keeping their money in the bank rather than as cash at home. However, at some point, if negative interest rates become high enough, bank depositors may elect to take their cash out of the system. For example, a credit card holder may choose to make a large upfront payment on a credit card and then run down the balance rather than the usual practice of making purchases first and payments later.
In any case, the actions by the world’s central banks, the FED, that were used to avoid The Great Depression Part 2 are now coming home to roost.
By using untried and untested measures to avoid what was a banking system-created crisis in the first place, central banks have backed themselves into a policy corner from which extrication may be painful. We need look no further than the current situation in Switzerland; even though it is small by world standards, the Swiss economy is showing how the impact of unconventional monetary policy can have wide-ranging and unexpected results.
In my opinion, Swiss authorities should consider introducing temporary negative interest rates to discourage foreign investors from holding CHF in the event the currency begins to appreciate again and preserve its competitiveness.
My conclusion is that the likelihood of a negative interest rate being imposed by the ECB is near zero. It is not going to happen. However, a bold move from Mr. Draghi could eventually trigger local repercussion and force the SNB into action mode.