Research Team at Rabobank, notes that in a recent interview SNB Chairman Thomas Jordan said that the Swiss banking system is still working well with negative rates, but that they are a bigger challenge for insurers. Key Quotes “Moreover, he said that the SNB keeps a close eye on the actions by the ECB and that the fear of a massive flight to physical currency so far has been unfounded. The discussion on the abolition of EUR 500 notes has not gone unnoticed in Switzerland too, but Thomas Jordan said that there is no plan to eliminate banknotes in Switzerland. To the contrary, some parliamentarians have already called for the introduction of CHF 5,000 notes! Going forward, we expect the SNB to cut its rate on sight deposits from -0.75% to -1.00% on March 17 after it kept rates unchanged in December. In fact, a rate cut has been almost fully priced in. Indeed, the closest forward on 3 month Libor is trading around -1.00% and the 3 month cash rate Libor rate is creeping lower each day. But we have seen this before! In December – just before the ECB’s rate decision – a 25 bps rate cut was almost fully priced in. However, the stimulus announced by the ECB in December fell short of expectations and this reduced the pressure on the SNB. There are certain limits to what the SNB can do, and we do not believe the bank will cut further than -1.25% (perhaps they will already reach this in June this year). We also believe the SNB will face political headwinds in case its total balance sheet exceeds 100-110% of nominal GDP. We would therefore argue that the amount it could buy is limited to another CHF 50bn.” For more information, read our latest forex news.