“Perverse, Unpredictable Effects” of Negative Interest Rates: Mortgage Rates Soar in Switzerland
by Wolf Richter
WolfStreet.com
December 16, 2015
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.
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