Moreover, yields on government and corporate bonds have declined since the negative interest rate was introduced, as did mortgage rates, albeit to a lesser extent. Overall, financing costs for households and businesses are lower today than they were before the introduction of negative interest. Along with the rise in the volume of bonds issued, this is evidence that negative interest is also having some impact via the credit channel, even though growth in bank lending has not risen as would normally be expected. 2  On 18 December 2014, the SNB decided to charge interest of –0.25% on sight deposits held by banks and other financial market participants at the SNB. With the discontinuation of the minimum exchange rate, the interest charge was lowered further to –0.75%. Page 6/16  Challenges posed by low interest rates In Switzerland, therefore, negative interest rates have had the desired effect. Yet low interest rates also present a number of challenges and potential side-effects, which I would like to look at now. One challenge is communication. At first glance, imposing a charge on deposits appears to turn the logic and laws of economics on their head. It seems unnatural to pay interest on deposits. Consequently, clear communication of monetary policy is especially important right now. In the earlier part of my presentation, I demonstrated that negative interest rates in Switzerland are the result of a decline in the equilibrium interest rate and the SNB’s expansionary monetary policy – a policy rendered necessary by global conditions.
Negative interest also puts a strain directly on banks, and indirectly on pension funds and life insurance companies, which worry about their profitability and about meeting their obligations. As I have mentioned, the SNB takes these concerns very seriously. Yet the challenges now facing pension funds are not caused first and foremost by monetary policy. Rather, their problems stem from the fact that pension funds have to achieve returns that are nominally fixed and were set when the equilibrium interest rate was higher. For banks, the negative interest rate undoubtedly represents a cost because they have to pay interest on their deposits at the SNB. However, the SNB grants a generous exemption threshold, which reduces the effective interest rate burden for the banking sector. These exemption thresholds give banks the freedom to decide whether – and to what extent – they should pass on negative interest to their customers. From a financial stability perspective, it is not negative interest per se which poses a challenge, but rather the low level of interest rates more generally. It is conceivable that low interest rates will lead investors to take greater risks. This can result in imbalances developing on the real estate and mortgage markets. In Switzerland, a variety of measures have been implemented since 2012 – the countercyclical capital buffer for instance – with the aim of reducing the associated financial stability repercussions. Since then, the pace of growth on the real estate and mortgage markets has slackened somewhat, although mortgages continue to grow faster than GDP.