The Swiss National Bank on Monday said it will reduce the amount of interest it pays commercial banks for money deposited with it overnight after costs soared with the end of its negative-rate regime and efforts to stem the rise of the safe-haven franc.

The SNB paid out 3.3 billion Swiss francs ($3.66 billion) in interest on sight deposits in the first six months of 2023, after reversing an almost eight-year run of negative rates during which commercial banks were forced to pay the central bank to park cash overnight.

European Central Bank policymakers are also considering ways to reduce interest payments to the euro zone's commercial lenders early next year, Reuters reported earlier this month.

In Switzerland, sight deposits held to meet minimum reserve requirements will no longer be remunerated from Dec. 1.

From the same date, banks will be paid the SNB's policy rate, currently 1.75%, on deposits equivalent to 25 times their minimum reserve requirements, down from 28 times.

Sight deposits held above a bank's individual threshold will be paid the SNB's policy rate, minus a discount of 0.5 percentage points, it said.

"The changes have no impact on the current monetary policy stance," the SNB said. "These adjustments will ensure that monetary policy implementation remains effective and will reduce interest costs for the SNB," it added.

The SNB declined to comment on the level of savings it expected to achieve, but Reuters calculated it would amount to around 300 million Swiss francs per year just from scrapping interest on minimum reserves.

UBS economist Maxime Botteron estimated the total saving could be around 700 million francs per year, at the SNB's current policy rate of 1.75%.

With excess deposits earning 50 bps less than the policy rate, banks will have an incentive to lend in the money market, contributing to higher activity and supporting the transmission of monetary policy, he added.

The central bank made a loss of 1 billion francs on its Swiss franc positions last year, after a shift to positive interest rates in September 2022 saw it pay out more than the income it had generated from negative overnight rates earlier in the year.

It made a total 2022 full-year loss of 132.5 billion francs, mainly due to losses on its foreign currency investments.

"It is politically difficult for a central bank to keep paying interest to commercial banks when it is making a loss and not transferring profits to the government, especially after a period in which the interest paid to savers has been negligible," said Stefan Gerlach, Chief Economist at EFG Bank.

The SNB had mostly used sight deposits to conduct foreign currency transactions aimed at keeping the strength of the safe-haven Swiss franc in check - crediting the local currency accounts of commercial banks with newly created francs in exchange for foreign currencies.

The massive foreign currency purchases saw sight deposits soar to nearly 700 billion francs last year, although the figure has been declining in recent months. ($1 = 0.9022 Swiss francs) (Reporting by John Revill Editing by Miranda Murray, Kirsten Donovan)