According to the forecasts of the global macro models of Trading Economics, as well as analysts' expectations, Switzerland's GDP will reach 729 billion US dollars by the end of 2020. Meanwhile, according to our econometric models, in the long run, Switzerland's GDP will reach 740 billion US dollars in 2021, and 765 billion US dollars in 2022.
At its meeting last December, given the country's prospects of inflation, the Swiss National Bank kept the SNB policy at -0.75 percent, stating that an expansionary monetary policy is still necessary.
Politicians have agreed that the franc is still highly valued, and that the situation in the market is still fragile. The bank said that the interest rates will remain at current levels until at least 2021, saying that in 2019, inflation was at 0.4%. In 2020, it is projected to be at 0.1%, and in 2021, at 0.5%.
According to the global macro models and analysts' expectations, by the end of this quarter, interest rate in Switzerland will be at -0.75%. Meanwhile, according to econometric models, the Swiss interest rate is projected to be around 0.75% in 2020.
The first problem with negative rates is their potential impact on bank profitability. Banks perform a key function by matching savings with useful projects that provide a high rate of return. There, they earn a spread, which is the difference between what they pay depositors and what they take out on loans that they make. When central banks lower their interest rates, the general trend is to reduce this spread, as general lending and long-term interest rates tend to fall. When rates fall below zero, banks may be reluctant to pass on negative interest rates to their depositors, charging fees on their savings for fear that they will withdraw their deposits. If banks refrain from negative deposit rates, this can, in principle, turn the credit spread into a negative one, since the return on the loan will not cover the cost of keeping deposits. As a result, it can reduce the profitability of banks and undermine the stability of the financial system.
The second problem associated with negative interest rates is that it will give depositors an incentive to switch from making deposits to storing money. After all, it is not possible to reduce the face value of money (although some suggest getting rid of money altogether in order to make it possible to apply deeply negative rates if necessary). Because of this, there are concerns that negative rates may reach a turning point where after which, depositors will pour out of banks and place their money in cash outside the banking system. We don't know for sure where this lower bound on interest rates is effective, but in some cases, falling below this lower limit can undermine the liquidity and stability of the financial system.
Indeed, banks may charge other fees to recover costs, and rates have not become negative enough for banks to try to pass on negative rates to small depositors (larger depositors have accepted some negative rates for the convenience of storing money in banks). Nevertheless, concerns about limiting the negative interest rate policy remain, as cash is still available as an alternative.
In general, a low neutral rate means that short-term interest rates can reach the zero lower bound and remain there for long periods of time. If this happens, central banks will have to resort to what was previously considered as unconventional policies, such as negative interest rates.
