Bloomberg

(Bloomberg) -- The strong franc has made cutting interest rates far below zero a necessary action for the Swiss National Bank, according to Governing Board member Andrea Maechler.

“Do we like the negative interest rate? Is it a choice? It is certainly not a choice to have negative interest rates -- and in the case of Switzerland, it is a necessity,” Maechler said in Singapore on Thursday. “We still believe that the Swiss franc is heavily overvalued.”

A record low deposit rate of minus 0.75 percent combined with a pledge to wage currency market interventions have been the cornerstone of the SNB’s monetary policy for the past 15 months, designed to combat an overvalued currency. Maechler said the SNB’s monetary policy remains expansionary.

She also highlighted that there was a lower bound to negative rates, adding that it’s “not clear” how low rates could go. According to Bloomberg’s most recent survey of economists, the SNB can take its deposit rate to minus 1.25 percent before people begin to hoard cash to circumvent the charge.

Because of the strong franc, Swiss consumer prices declined the most in six decades in 2015 and are set to remain for some time well below what the central bank considers price stability -- inflation close to 2 percent. Maechler acknowledged that the inflation rate was “too low for our comfort,” adding that factors driving the measure were temporary.

“We are convinced that for Switzerland and for its inflation outcome it is better to have this kind of negative interest rates that helps reduce the attractiveness of Swiss-denominated investments,” she said.

As for the future, Maechler remained cautious.

“As long as interest rates around the world are so low and the inflation rates remain low, it seems difficult to imagine that Switzerland would be in a position where it would start raising its interest rates,” she said.

To contact the reporters on this story: Klaus Wille in Singapore at kwille@bloomberg.net, Jan Dahinten in Singapore at jdahinten@bloomberg.net. To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss

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