Negative rates might have been needed to tackle a highly overvalued currency but the benefits of this policy have faded. It is now causing big problems, the SBA said.

Switzerland’s negative interest rate policy, which has been in place since the end of 2014, is no longer needed. It hurts savers and fuels asset bubbles, a report by the Swiss Bankers Association said yesterday. It added that the country must change course.

While written in the typically restrained language of such missives, a report from the SBA looking into central bank policy makes it clear that the current -0.75 per cent rate is causing considerable pain and concern. Already, major banks such as UBS, Credit Suisse and others have started to charge high net worth clients with deposits over a certain size additional fees. Negative rates have arguably also prompted more consolidation in the Alpine state's sector. Swiss capital adequacy buffers are typically higher than in most countries, which has intensified the pain. The pressure on margins also adds to the loss to the country's former international attraction - its secrecy laws.

“Negative interest rates have been in place in Switzerland for almost five years. The measure introduced by the Swiss National Bank (SNB) at the end of 2014 was justifiable for a number of reasons. Since then, the once successful emergency measure has become the `new normal’,” the SBA said in a study.

The report said the desired effects of negative interest rates on the economy have diminished. Instead, they have stoked up other problems, such as a property sector bubble, caused by people shunting money out of squeezed fixed income investments. 

“We are monitoring not only the banks, but also the economy as a whole. The banks have their fingers on the pulse of the matter and are witnessing the adverse consequences of negative interest rates on Swiss citizens, our companies and the overall economy,” Jörg Gasser, CEO of the Swiss Bankers Association, said. 

Switzerland is not alone in adopting negative rates. Japan and the Danish central bank rates are also negative. When inflation is taken into account, the actual interest rates in many countries, such as in their bond markets, are negative. A large chunk of the German government bond yield curve is negative which, in practice, means that an investor has to pay to lend the state money. Over a long period of time, this destroys a country’s capital base by destroying savings.

Among the destructive effects of negative rates is that pension funds struggle to meet their liabilities, the SBA report said. 

“On the one hand, banks are passing some of the negative interest rates on to their large customers, such as pension funds. On the other hand, negative interest rates have further lowered the overall interest rate level in Switzerland and thus reduced pension fund members’ returns almost across the board. This has economic and social consequences – particularly for the pensioners of tomorrow,” it said.

In light of the limited effect and the adverse consequences of negative interest rates, the study concludes that ways to exit crisis mode must be found. Martin Hess, chief economist of the Swiss Bankers Association, said: “Negative interest rates are comparable to emergency medication: they can be very beneficial in the short term despite the risks. In the long term, however, they become less effective, and the side effects increase steadily.”