[text] Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors | Zero Hedge

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"Our ears did perk up however, when Mario Draghi admitted that, unlike the governing council’s last meeting, cutting the depo rate further into negative territory was indeed discussed.* This is significant for a number of reasons. At the general level, it shows that DM central bankers are ready and willing to plunge the world further into the Keynesian Twilight Zone. As we outlined last month, this means the Riksbank and the SNB are now on watch. If the ECB cuts again, the Riksbank will be forced to act as well and as Barclays recently opined, the SNB may be compelled to go nuclear on depositors, as removing the negative rate exemption for domestic banks would force them to pass along the “cost” to customers:*

Quote:

Originally Posted by ECB “In contrast, a cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB. An SNB response to an ECB deposit rate cut could take one of two forms: 1) a further cut in its deposit rate and CHF Libor target range; or 2) the ‘nuclear’ option, removing all exemptions from the negative deposit rate. We think the latter is more likely and would have major implications for EURCHF."*Most retail (private) depositors at domestic Swiss banks still do not face negative interest rates, but we would expect that to change if the SNB removed exemptions of domestic banks on sight deposits at the SNB.*A removal of domestic banks’ exemption from negative deposit rates likely would force Swiss banks to pass on negative deposit rates as it would increase the proportion of assets charged negative rates to over 20%.

This is an important concept not only for what it says about the never-ending, tit-for-tat, beggar- thy-neighbor monetary policies that now pervade developed markets, but also for the degree to which it explains why NIRP has not yet led to a sharp increase in the demand for physical banknotes. Put simply: depositors haven’t yet felt the effects of the monetary insanity engendered by the global currency wars.*"

[text] Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors | Zero Hedge