The Swiss National Bank (SNB) has announced that it will abandon the peg of CHF1.20 per euro whilst further lowering the interest rates on sight deposit account balances to -0.75%, moving the target for the three month Libor further into negative territory.
The peg on the exchange rate has been introduced in 2011, in a bid to prevent a growing appreciation of the Swiss franc as a result of the crisis in the eurozone.
However, the fixed exchange rate has come under growing pressure as investor’s anticipation of ECB QE measures reduced the value of the euro whilst geopolitical unrest in the Ukraine led to further capital inflows into Switzerland.
The SNB justified this measure by stating: “The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified.”
At the same time, it also decided to move its target range for the three month Libor further into negative territory, suggesting that the pressure on the Franc persists. The SNB stated that it aims: “to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions. The SNB will continue to take account of the exchange rate situation in formulating its monetary policy in future. If necessary, it will therefore remain active in the foreign exchange market to influence monetary conditions.”
The move comes one day after the European Court of Justice has ruled broadly in favour of ECB bond buying measures.
Jeremy Cook, chief economist at the international payments company, World First comments: “The Swiss National Bank has thrown in the towel and given up trying to weaken its currency in the face of outright deflation and a falling European single currency.”
“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. Nobody wins when you stand in the way of a freight train, except for the train.”
Following the SNB announcement, the value of the franc jumped by 16% against the euro, as of 11 CET, according to Bloomberg data.
SNB president Jordan (pictured) is set to hold a press conference at 1:15 today.