Swiss interest rate probably reached a low point

The SNB kept the sight deposit interest rate unchanged at minus 0.75%, and 3M CHF Libor range between -0.25% and -1.25%. 


This is not a surprise considering the ECB did not announce any changes a week earlier. We have seen a clear improvement on Swiss GDP (although helped by higher government spending) and CPI since the stabilization of the EUR/CHF around 1.10, hence, we expect the SNB to continue to watch closely any ECB action, and take actions accordingly.
Last week the ECB remained inactive, and unusually quiet about any possible future action. We think that similarly to Japan, negative interest rates hurt European banks too much to have any long term benefit on the economy. With balance sheets already weakened by high capital requirements, banks are reluctant to lend, as small profit margins no longer justify the risk of default. European banks lending activity has especially decelerated abroad, which has the effect of strengthening the euro. This means that as long as banks remain under pressure, liquidity injections will struggle to reach the real economy, hence the ECB has no interest in cutting the rate further.
For Switzerland this means that we have probably reached a low point for interest rates. However the SNB will remain vigilant and may intervene on the foreign exchange market in case of volatile movement in the Swiss franc, as was the case during the Brexit vote.

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