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Monetary policy Swiss predict budget surplus thanks to negative interest rates

Switzerland's central bank chief Thomas Jordan has said interest rates can be cut further into negative territory if needed


Negative interest rates across Europe have alarmed savers and created topsy-turvy financial markets. For the Swiss federal government they have created an embarrassment of riches.

Bern yesterday reported it would this year run an unexpected CHF2.2 billion ($2.21 billion) budget surplus as a result of Swiss taxpayers rushing to settle their bills early and investors in Swiss bonds paying to lend money to the government. 

The government had previously forecast a small deficit. 

While the Swiss are known for their orderliness and punctuality, the revelation nevertheless highlights the perverse effects of negative interest rates set by European central bankers to shore up economies.

Rather than pay charges for keeping cash in bank accounts, Swiss companies in particular have preferred to hand it over to the government, which until recently offered bonuses for early tax payments.

“People will probably laugh at the situation in Switzerland, where everyone is rushing to pay their tax bills, but it is absolutely rational,” said Daniel Kalt, chief economist at UBS in Switzerland.

Pay to lend

Early last year, Switzerland’s central bank pushed official interest rates deep into negative territory as it  battled to prevent the strong Swiss franc affecting the country’s export industries.

The Swiss National Bank’s policy interest rate has since remained at minus 0.75%, with the effects rippling through financial markets.

Interest rates are negative on Swiss government bonds with up to at least 20 years before maturity, meaning, in effect, investors pay money to lend to the country.

Although Swiss retail banks have largely shielded ordinary bank customers from negative interest rates, companies face penalties for holding large amounts of cash.

That has increased the appeal of incentives traditionally offered by Swiss cantons as well as the federal government for early tax payments.

Companies entitled to tax rebates had also waited to reclaim funds from the state, the finance ministry in Bern said.

Side effects

According to yesterday’s estimates, the Swiss government expected to book CH68.4 billion in income this year, some CHF1.7 billion higher than was previously forecast. Expenditure, meanwhile, was expected to be CHF1 billion lower than originally budgeted.

Thomas Jordan, SNB chairman, earlier this week repeated his warning that a prolonged period of negative interest rates would create “undesirable side effects”, including the hoarding of Swiss franc notes and threats to financial stability.

The federal government is not only enjoying a boost to its finances. It does not have to worry about paying charges on cash accounts either: it is specifically excluded from the negative interest rates imposed by the SNB, which acts as its banker.

Rather than celebrating its relative fortune, however, the Swiss finance ministry predicted that the unexpected windfall would not last.

“When interest rates normalise again, there will be falls in income and higher interest payments,” it said.

Copyright The Financial Times Limited 2016

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