The Swiss bank slashed interest rates to -0.75 percent, abandoning its control of the exchange rate. Causing the Swiss franc to rise by almost 30 percent against the euro.
The Swiss National Bank’s decision to scrap its exchange rate control saw the currency move to parity with the euro. Previously the franc was restricted to a maximum value of €0.83. Swiss stock markets immediately dived by more than 10 percent, sending the euro-franc currency markets into a state of panic.
Adding to the uncertainty in the region, there are expectations that the European Central Bank could launch a quantitative easing scheme in late January – further reducing the strength of the European single currency. “A further appreciation against the euro could have serious implications for the economy given that Switzerland has typically sent nearly half of its exports to the eurozone and about 10pc to the US,” said Jennifer McKeown, of Capital Economics.
Chief Executive of international payments company World First, said the Swiss National Bankhad effectively “thrown in the towel”. “This is a complete capitulation. The pressure and belief that the European Central Bank will launch a bond buying program in the coming week – further devaluing its currency – has been enough to make the Swiss National Bank step out of the way,” he said.
Steen Jakobsen, chief economist at Saxo Bank, said the move will come to be seen as rational.
“This will be seen as not only rational but also as the protection of long-term Swiss growth and inflation expectations,” he said. “The SNB is effectively acknowledging that the business cycle needs to run its course, the artificial weak CHF had the indirect consequence of inflating an already strong real estate market and placing Swiss monetary policy at the door of ECB.”
This decision by the SNB will cause many investors to reconsider their strategy. Traditionally, the franc has been seen as a safe haven and a stable currency partly due to the controls that have been in place since the financial crisis. The peg was originally implemented to stop the rise of the Swiss currency which was crippling exporters.
The SNB said that its minimum exchange rate mechanism had been “introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets”. It added: “This exceptional and temporary measure protected the Swiss economy from serious harm… the overvaluation has decreased as a whole since the introduction of the minimum exchange rate”.