But what is important for the Swiss franc, and thus for the Swiss economy, is not domestic interest rates in an absolute sense, but relatively speaking – i.e. the differential between Swiss and foreign interest rates. Historically, Swiss nominal interest rates have tended to co-move with those in other countries, albeit usually at lower levels, especially when compared to the euro area. The comparatively low interest rates in Switzerland are, first, the result of low and stable inflation. Second, they provide incentives for capital outflows, which are the counterpart of the traditional current account surplus. Since the financial crisis, interest rates have dipped towards the zero lower bound in many advanced economies, so that this classic rate differential has virtually disappeared. In order to re-establish a clear differential, the SNB has lowered its reference interest rate into negative territory, exerting downward pressure on the entire Swiss interest rate curve. As chart 3 shows, using yields from Swiss and German five-year government bonds, since then the interest rate differential to other countries has widened again. Similar developments can also be observed for all other bond maturities. Thus, the situation as regards the interest rate differential has not changed since 15 January; rather, it has partly normalised thanks to the negative interest rate. So the introduction of negative interest achieved an important objective. Lower interest rates make Swiss franc investments less attractive compared to foreign investments. Of course, the interest rate differential is not the only factor behind the demand for Swiss francs.

This reluctance can partly be explained by the fact that retail bank customers regard cash holdings as an attractive alternative to bank deposits, and could withdraw their deposits if interest rates turn negative, thereby depriving the banks of an important refinancing source. Thus, uncertainty over the collective behaviour of bank customers could be seen as a factor dissuading banks from passing on negative interest rates. As a result, banks’ liability margins – the difference between the interest on a maturity-matched alternative funding source and the interest on deposits – have dipped into negative territory.4 This is clearly illustrated in chart 6. Banks have responded to the pressure on liability margins by raising mortgage rates (i.e. by increasing the asset margin). In principle, the slight rise in mortgage rates is good news from a financial stability standpoint. So can negative interest rates even be regarded as a tool to combat imbalances on the  2  Cf., for instance, O. Jordà, M.HP. Schularick & A.M. Taylor, Betting the House, NBER Working Paper 20771, 2014, M.D. Bordo & J. Landon-Lane, Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence, NBER Working Paper 19585, 2013, or L. Gambacorta, The Risks of Low Interest Rates, Ensayos Sobre Política Económica, 29, 64: 14-31, 2011. 3  The same applies to all bank loans. 4  The bank’s total margin is made up of three components: asset margin, liability margin and transformation margin, minus any hedging costs (so-called structural contribution).