Unintended Consequences – Mortgage Borrowing Costs Rise in Switzerland Despite Negative Interest Rates

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Wait a minute, this wasn’t supposed to happen…

Remember back in December when we highlighted that one of the responses to central banks’ introduction of negative interest rates might actually be a raising of interest rates by banks to borrowers?

The bank’s preferred solution then might be to keep income up by widening the spread between deposit rates and borrowing rates by increasing the interest rate charged to borrowers. And thus dropping into negative interest rates on deposits can lead to a rise in interest rates for borrowers.

Well, that apparently is happening in Switzerland, whose central bank has had negative interest rates for over a year.

In response, it seems, Swiss banks have pushed up the cost of mortgages, particularly long-dated ones, with spreads more than doubling on average, according to Brupbacker and Nemes. At the same time, the lower bound on retail deposits has been maintained, for the obvious reason of not wanting to incentivize customers to turn up at branches and demand their cash.

It seems that borrowers are trying to lock in lower interest rates by taking out longer-term loans, causing banks to raise the interest rates on those loans so as to maintain or widen the spread between rates charged to borrowers and offered to depositors.

Just the latest indicator that NIRP is proving to be a worthless policy tool, and that QE, i.e., the redistribution of wealth upward to oligarchs via central bank asset purchases, remains the only real game in town.

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