Swiss National Bank cuts overnight deposit rates to curb soaring interest costs

By John Revill

ZURICH (Reuters) -The Swiss National Bank is set to reduce the amount of money it pays commercial banks after it announced on Monday a cut in interest it pays lenders who park cash with it overnight.

The SNB announced the change after costs soared with the switch from negative interest rates – aimed at stemming the rise of the safe-haven franc – to positive rates as its focus shifted to battling inflation.

It paid out 3.3 billion Swiss francs ($3.66 billion) in interest on sight deposits in the first six months of 2023, after reversing a near eight-year run of negative rates during which commercial banks paid the central bank to park cash overnight.

European Central Bank policymakers are also considering ways to reduce interest payments to the euro zone’s commercial lenders early next year, Reuters reported earlier this month.

In Switzerland, sight deposits held to meet minimum reserve requirements will no longer be remunerated from Dec. 1, under the changes announced on Monday.

From the same date, banks will be paid the SNB’s policy rate, currently 1.75%, on deposits equivalent to 25 times their minimum reserve requirements, down from 28 times.

It also set interest on deposits held above a bank’s individual threshold at 0.5 percentage points below the SNB’s policy rate.

“These adjustments will ensure that monetary policy implementation remains effective and will reduce interest costs for the SNB,” the SNB said.

“The changes have no impact on the current monetary policy stance,” it added.

The SNB received 11.3 billion Swiss francs from the banks during the era of negative rates, but flows reversed when its rates entered positive territory in September.

“Now that the interest rates are positive, the central banks still pay interest and this is costly,” said Yvan Lengwiler, professor of economics at the University of Basel.

This has been a big issue for the SNB because of the high level of cash held in sight deposits for banks – 472 billion francs according to the latest data on Monday.

The SNB declined to comment on the level of savings it expected to achieve.

UBS economist Maxime Botteron estimated the SNB could be saving around 700 million francs per year at its current policy rate.

With excess deposits earning 50 basis points below the policy rate, banks will have an incentive to lend in the money market, contributing to higher activity and supporting the transmission of monetary policy, he added.

The central bank made a loss of 1 billion francs on its Swiss franc positions last year after the payments that followed the September shift to positive interest exceeded the income from negative overnight rates earlier in the year.

It made a total 2022 full-year loss of 132.5 billion francs, mainly due to losses on its foreign currency investments.

“It is politically difficult for a central bank to keep paying interest to commercial banks when it is making a loss and not transferring profits to the government, especially after a period in which the interest paid to savers has been negligible,” said Stefan Gerlach, Chief Economist at EFG Bank.

The SNB had used sight deposits to conduct foreign currency transactions aimed at keeping the strength of the safe-haven Swiss franc in check – crediting the local currency accounts of commercial banks with newly created francs in exchange for foreign currencies.

($1 = 0.9022 Swiss francs)

(Reporting by John RevillEditing by Miranda Murray, Kirsten Donovan and Tomasz Janowski)