Negative rates: Waste of time?
– The SNB last deployed negative rates to combat CHF strength back in the 1970s. It introduced a penalty charge of 2% per quarter on some CHF deposits in June 1972. In November 1973, this was increased to 3% and then it was hiked to 10% in February 1978.
– As the DEMCHF chart shows, it didn’t work. DEMCHF fell from above 121.00 to around 80.00 over this period. I assume that the IR differential between CHF and DEM rates must have been far larger than the differential now between CHF and EUR.
– History has shown that weak currencies are not boosted by high rates (eg RUB this week), while strong ones are not weakened by low rates. It will be interesting to see if the SNB succeeds this time. EURCHF is now 1.2045 after trading as high as 1.2097,