How Negative Rates Were Used Alongside FX Intervention

The Swiss National Bank (SNB) deployed deeply negative interest rates in tandem with direct foreign-exchange intervention to combat the franc’s relentless strength—a policy pairing that reveals how negative interest rates alongside FX intervention force currency movement when conventional tools fail.

The Problem: Unstoppable Safe-Haven Demand

From 2010 onward, the Swiss franc strengthened relentlessly as investors fleeing eurozone debt crises sought a safe parking place. Even as the SNB cut interest rates toward zero, the franc kept climbing. Why? Safe-haven flows overwhelm small interest-rate differentials. Investors preferred zero (or near-zero) rates in francs over higher rates in euros if they perceived the euro as at risk.

By 2014, the franc had become overvalued on any conventional measure. Swiss exporters—watches, machinery, pharmaceuticals—faced punishing exchange rates. Inflation was barely positive and edging toward deflation. The SNB faced a dilemma: lower rates further or find another lever.

Conventional textbooks say that rate cuts should weaken a currency by making it less attractive to hold. But this mechanism fails when an entire region is in crisis. The SNB decided to combine rate cuts with direct intervention: attack the problem from both angles.

How Negative Rates Strengthen Intervention

Negative interest rates don’t work in isolation at the zero bound. But they become a multiplier for FX intervention.

Here’s the mechanism: when the SNB pushes rates deeply negative (say, −0.75%), it imposes a penalty on holding francs. Banks and institutional investors face negative returns simply by holding cash at the central bank. At the same time, the SNB is actively buying euros and dollars in the spot market, flooding the system with these currencies and soaking up francs.

The two moves reinforce each other. The negative rate makes the franc less attractive. The market intervention is buying the franc’s competitors. Together, they create downward pressure on the currency that neither tool achieves alone.

Without the negative rates, intervening to buy euros would inject euros into the market, but investors could park them at zero rates risk-free. The franc would still be bid. Without intervention, negative rates might push some cash into foreign assets seeking positive returns, but the flow is gradual and limited by the costs of international transactions and hedging.

But combine them: the SNB buys billions of euros (creating the supply), while simultaneously making franc cash holders pay to hold their currency. Arbitrage opportunities narrow. The franc weakens.

The Mechanics: Step by Step

Step 1: Establish the negative-rate corridor. The SNB’s deposit rate becomes −0.75%. Banks are charged to park overnight funds at the central bank instead of earning interest.

Step 2: Direct intervention. SNB traders enter the foreign-exchange market and purchase euros and dollars using newly created francs. These purchases show up in the SNB balance sheet as foreign reserves.

Step 3: Float creation. The new francs created for intervention must somewhere. Banks hold them or pass them to customers. Those holding francs overnight face negative rates. Incentive: convert to euros or dollars to avoid the penalty.

Step 4: Sustained pressure. As long as the SNB continues purchasing foreign assets and maintaining negative rates, the cycle persists. The franc weakens, but the SNB’s balance sheet expands dramatically (foreign assets climb).

Why Both Levers Are Necessary

To understand why the SNB needed both negative rates and intervention, consider what happened in 2015 when the SNB abandoned the euro peg (a prior tool) and shifted to pure negative rates + intervention.

If the SNB had relied only on negative rates without intervention, would it work? Partially. Some investors might shift cash to euros or dollars. But the flows would be constrained by transaction costs and hedging expenses. The franc would depreciate modestly, not the sharp weakening the SNB sought.

If the SNB had intervened (bought foreign assets) without negative rates? It would add foreign reserves to the balance sheet, but without the rate penalty, investors could hold francs at zero and wait out the SNB’s purchases. Eventually, the supply of foreign currency offered by the SNB would be exhausted or political pressure would mount. The franc would strengthen again.

Only by combining them—penalizing franc holdings while actively bidding for euros and dollars—does the SNB overcome the structural safe-haven demand that keeps the franc bid.

The Balance-Sheet Trade-Off

A critical cost: the SNB’s balance sheet ballooned. By early 2015, foreign-exchange reserves exceeded CHF 500 billion, more than 70% of Swiss GDP. The SNB became a massive holder of euros and dollars—assets it would eventually have to sell or hold indefinitely.

This creates a latent loss if the franc appreciates in the future (and it did, once safe-haven demand shifted post-2022). The SNB’s intervention purchases euros at higher franc prices; later, if the franc strengthens, those euros are worth fewer francs in accounting terms.

This trade-off is conscious. The SNB accepted a future balance-sheet loss to prevent immediate deflation and currency collapse. It is an implicit subsidy to exporters: the SNB absorbs the FX loss so exporters can operate at realistic exchange rates.

Broader Policy Lesson

The SNB’s experience demonstrates a key insight: monetary policy at the zero bound requires multiple levers. Neither negative rates nor intervention alone solved the franc problem. Only by deploying both—penalizing the currency while purchasing its competitors—did the SNB achieve meaningful depreciation.

This framework applies beyond the franc. The European Central Bank, Bank of Japan, and other central banks have adopted negative rates + intervention strategies when conventional rate cuts hit zero. The lesson: when one tool reaches its limit, combine it with another.

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