The retirement of Mario Draghi as head of the European Central Bank (ECB) was marked with great ceremony at the end of October. German chancellor Angela Merkel was just as insistent on attending the event as France's president, Emmanuel Macron, and Italy's head of state, Sergio Mattarella. In their speeches the politicians were full of praise for Draghi. "You have preserved and maintained the independence of the European Central Bank and strengthened the currency union," Angela Merkel stated. Draghi did indeed do everything in his power to stem the euro crisis. A speech he gave on the issue in London in the summer of 2012 has still not been forgotten. The ECB, the Italian declared at the time, would do whatever it took to rescue the euro. Many experts see that "whatever it takes" statement as marking the turning point in the crisis. More or less simultaneously with this promise, the ECB cut its base rate to less than 1% for the first time. In five further steps the central bank pushed the rate down to the zero mark – where it has stubbornly remained since March 2016.
By the end of his term of office it was looking as if Draghi could start to tighten monetary policy. But the Brexit chaos and trade wars put a spoke in his wheels. Now the 72-year-old is going down in history as the first ECB president under whose aegis there was not a single rise in interest rates. His successor, Christine Lagarde, is unlikely to change the ultra-loose approach much for the time being. While the US Federal Reserve has just executed an about-turn with three interest rate cuts in succession, the Swiss National Bank also does not see any end in sight to the extremely relaxed pace. Martin Schlegel, a member of the SNB's governing board, recently even floated the idea of a further cut. Should other central banks such as the Fed or ECB ratchet their key rates down even further, he said at an event in Zurich, the SNB would also consider steps. At -0.75%, the key rate in the Swiss franc area is already well below the level of the eurozone and the USA (see graph). View more information on investment solutions on the topic “Negative interest rates: long inconceivable, now becoming reality”.
On 1 November the SNB somewhat moderated the burden on banks resulting from its policy, increasing the allowance for which negative interest rates do not apply. Nevertheless, this is having an ever greater toll on domestic savers. To put it bluntly, no longer are investors just getting nothing back on their fixed-interest accounts, they must also reckon on deductions. "As other banks have already been doing for a long time, Credit Suisse is also introducing negative interest rates for customers with very high cash holdings in Swiss francs," the country's second-largest bank recently told the SRF. The fee applies for both private and corporate customers with cash holdings from CHFm 2. Amounts exceeding this threshold will be charged an obolus of -0.75%. While the measure applies from as early as 15 November for corporate customers, it will not take effect for personal or savings accounts until 1 January 2020.
If they are to get round negative interest rates, investors need to keep an eye out for alternatives. Equity markets have yielded attractive earnings in the years since rates began to stagnate, including both price gains and distributions from companies. Dividends are already being touted as the "new interest rate". However, the risks associated with stock markets are frightening many savers away. Structured products are a sort of middle road: these instruments allow the potential of the investment class to be tapped while protecting at least part of the capital. The two factors come together in the Barrier Reverse Convertible: this structure pays a guaranteed coupon and, as long as the underlying equities or indices do not fall to or below a previously fixed threshold, the issuer will repay the nominal amount in full on maturity.
View more information on investment solutions on the topic “Negative interest rates: long inconceivable, now becoming reality”.
