Swiss rates cut to below zero

The Swiss National Bank (SNB) announced Thursday it will impose a rate of minus 0.25 percent on checking accounts at the bank in January, with the aim of pushing the target range of Switzerland's benchmark interest rate into negative territory.

SNB attributed the move to "renewed upward pressure" on the Swiss franc in relation to the euro in the past few days.

"Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development," said Thomas Jordan, chairman of the SNB governing board, in a statement.

The rapidly depreciating Russian ruble and worries over whether Greece will stick to its austerity policies have pushed investors towards safe assets such as the Swiss currency and German government bonds.

As a result, demand for the Swiss franc has surged, causing the SNB to take action to protect the country's vital export sector.

Swiss franc fortress

The negative interest rate will be imposed on so-called sight deposits, funds which can be accessed immediately. It will, however, only apply to account balances above 10 million Swiss francs ($12.5 million, or 8.29 million euros).

SNB's governing board chairman Thomas Jordan also said the move was aimed at making it "less attractive" to hold Swiss franc investments, and thereby would support the minimum exchange rate against other currencies, notably the euro.

He reiterated the central bank's "utmost determination" to keep to an exchange-rate floor of 1.20 francs to the euro - a move that effectively imposes a limit on how strong the Swiss currency can get.

"Without the minimum exchange rate, price stability in Switzerland would be seriously compromised," Jordan said, adding that SNB was prepared to purchase foreign currency "in unlimited quantities" and to take "further measures" if required.

SNB versus ECB

Analysts see the rate cut as the start of a "battle of measures" between the Swiss National Bank and the European Central Bank (ECB).

Jonathan Loynes, chief European economist with Capital Economics told the news agency AFP that the likely beginning of sovereign bond purchases by the ECB would put "further upward pressure" on the Swiss franc because the measure was intended to lower the value of the euro and fight deflation in the eurozone.

And Laurent Bakhtiari, market analyst at IG Bank told the same news agency: "From now on, the SNB will constantly have to be one step ahead of the ECB if they want to defend the 1.20 minimum rate."

With the ECB governing council meeting next on January 22, he said, it was likely the SNB would soon have to follow up the rate cut with further currency intervention.

uhe/sri (AFP, AP, dpa)