BASEL (Reuters) - The Swiss National Bank has room to push record low interest rates even further into negative territory but is well aware of the risks of keeping monetary policy ultra-loose for long stretches, SNB Chairman Thomas Jordan said on Monday.
The SNB in January 2015 abruptly abandoned its policy of keeping the euro/Swiss franc exchange rate <EURCHF=> above 1.20 per euro. It instead charges banks 0.75 percent for excess deposits at the SNB and says it will intervene when needed to rein in the franc, whose strength hurts the export-reliant Swiss economy.
Nearly two years later, not only short-term interest rates but also long-term yields on Swiss government bonds and some corporate debt are negative, Jordan noted, prompting concern about the impact on banks, pension funds, savers and investors.
A further fall in nominal interest rates could spur a flight into cash, which limits the scope for monetary policy action, he said it remarks prepared for a conference in Basel.
"In Switzerland, the cost associated with the current negative interest rate is clearly lower than the cost of holding cash. Consequently, demand for cash has not yet risen substantially. So the effective lower bound for interest rates has not yet been reached, but we know that it exists," he said.
Negative interest rates were having the desired effect, Jordan added.
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"Despite (the) monetary policy challenges and potential side-effects, in Switzerland the negative interest rate is currently indispensable, owing to the overvaluation of the Swiss franc and the globally low level of interest rates," he said.
"Nonetheless, the challenges and side-effects show clearly that we must aim for a normalization of monetary policy over time," he added, stressing that only structural reforms in big economies could pave the way for this.
Challenges included a strain on banks coping with interest margins and on pension funds and life insurance companies worried about profitability and meeting their obligations.
"The SNB takes these concerns very seriously," he said, but noted "generous" exemptions from negative rates on banks' deposits at the SNB let them decide whether and how much to pass on negative rates to clients.
Pension funds' challenges arise not primarily from monetary policy but rather from having to achieve returns that are nominally fixed and were set when the equilibrium interest rate was higher.
Still, he added: "The longer the low interest rate environment persists, the greater the risk that distortions in the banking system will arise, hampering the transmission of the negative interest rate via the credit channel."
(Reporting by John Miller; Writing by Michael Shields)