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“Perverse, Unpredictable Effects” of Negative Interest Rates: Mortgage Rates Soar in Switzerland

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The unintended consequences of NIRP.

Negative interest rates – called “punishment interest” in Germany – have morphed from sheer impossibility to solid reality in Europe. Having seen how they work, the Bank of Canada has invoked them now, and Fed Chair Janet Yellen, has put them “on the table” before a House of Representatives committee.

In Europe, after they became established as the latest method of flogging savers until their mood improves, all kinds of absurdities saw the light of the day. For example, bailed-out national governments can now fund their deficits at negative rates, extracting money from their bondholders, rather than paying them. Perhaps the coolest notion was that banks would be “paying your mortgage.”

That may have been an illusion – at least in Switzerland, where the Swiss National Bank slashed its benchmark rate on “sight deposits” to negative 0.75% on January 15, the day of the epic “Frankenschock.” That day, the SNB abandoned its cap on the franc, which within the blink of an eye, soared nearly 40% against the euro and the dollar, wiping out currency speculators in the process and shaking up global currency markets.

The negative benchmark rate had the effect that by now, 70% of franc-denominated corporate bonds trade with negative yields, according to Credit Suisse. And the theory was that mortgages would certainly head that way.



Initially, interest rates on 10-year fixed-rate mortgages plunged to about 1%, with some quoted below 1%, and folks were already speculating about 0% mortgages or negative-rate mortgages. But then something funny happened on the way to the bank: unintended consequences kicked in.

Swiss banks somehow decided, for whatever inexplicable reason, to make a living. That’s hard to do for banks when they lend out money in a negative interest-rate environment. So the biggest Swiss banks accomplished a unique feat: they’ve jacked up mortgage rates since then, with the 10-year fixed-rate now at about 2% and the 15-year fixed-rate at about 2.5%.

And they expect mortgage rates to rise further. Credit Suisse, in its latest report on mortgage rates, laments that the “Swiss economy continues to suffer from the strong Swiss franc” and that the economy in the third quarter “stagnated on a year-on-year basis.” So it expects that the SNB will “keep key interest rates at their current level.” And yet, it forecasts that over the “12-month horizon,” the 10-year fixed rate will rise to 2.3% (blue line) and the 15-year fixed rate to 2.8% (purple line):

This rise in mortgage rates “highlighted how unconventional monetary policies are producing perverse and unpredictable effects in European banking,” the Financial Times pointed out.

“We had some explaining to do why [mortgage] rates were not moving in parallel,” Paulo Brügger, treasurer at Raiffeisen bank, told the FT.

Switzerland is a country of savers. And their deposits are, according to the FT, “the most important source…