Article published in The Swiss Property Fair, IMMO’24 Magazine, January 2024.
Author: Michel Dominicé
Towards a Return to Negative Interest Rates
The increase in benchmark interest rates by major central banks and the Swiss National Bank (SNB) since 2022 might suggest that the world has returned to normal and that the era of zero or negative interest rates is behind us. On the contrary, we believe this increase is temporary and is a response to the wave of inflation caused by excessive macroeconomic stimulus during a time when industrial production was disrupted by COVID. We expect inflation to continue to decline to around 2% in the United States and 0.5% in Switzerland. At that level, the SNB will have no choice but to revert to negative interest rates.
How can this be explained?
The Knowledge Economy Has Opened a New Era
First, let us note that a fundamental change has occurred in capital markets with the emergence of the knowledge economy. What we refer to as the “knowledge economy” is one in which the component of know-how dominates that of fixed capital in entrepreneurial projects. In this environment, industry is less reliant on mobilizing savings for investment and more on human capital. At the same time, the increase in life expectancy has led to a higher propensity to save. As a result, we have observed negative real interest rates across all major currencies in the world since around 2010 (see Image 1), meaning interest rates are below the level of inflation. This new equilibrium is expected to last for the coming decades.
Persistent Excess Liquidity
In Switzerland, as elsewhere, this paradigm shift is also reflected in the balance sheet of the central bank. In the past, the Swiss National Bank (SNB) created monetary restrictions by providing only a limited amount of liquidity to the banking system to curb credit supply and the accompanying monetary expansion. Since the end of 2008, the SNB has had to align itself with the policies of the Federal Reserve and the European Central Bank (ECB) by expanding its balance sheet, otherwise the Swiss franc would have appreciated excessively (see Image 2). As a result, commercial banks hold significantly excess reserves with the SNB, theoretically enabling them to grant substantial additional credit to the private sector. However, in the knowledge economy, investment opportunities often require specific expertise, and mere access to capital is insufficient. Consequently, commercial banks cannot fully realize the lending potential represented by their liquidity deposited at the central bank due to a lack of suitable borrowers.
The SNB Pressed Again Towards Negative Rates
Since 2010, the Swiss National Bank (SNB) has faced three challenges. The first is the risk of excessive appreciation of the franc and the deflation that it may cause. The second is the risk of a real estate bubble induced by negative interest rates. The third is the risk of an expanding balance sheet and the losses that may result, as was the case in 2022. When inflation retreats to the target level of 2% in the United States, it is likely that inflation in Switzerland will be lower due to the ongoing upward pressures on the franc. In such a context, the SNB will not be able to intervene sustainably in the foreign exchange market without expanding its balance sheet, nor will it want to allow the Swiss franc to appreciate too quickly. Therefore, it will have no choice but to return to its policy of negative interest rates. We believe this will happen in about 2 to 3 years.
