SNB takes action to counter strong franc

In a bid to halt the rising value of the franc, the Swiss National Bank has reduced official interest rates by 50 basis points to a target range of 0-0.25 per cent.

It is the first time the SNB has lowered the interbank Libor rate since March 2009, and reflects growing pressure on the bank to act to counter the effects of the runaway franc on the Swiss economy.

In a news release announcing the move, the bank said it considered the franc to be “massively overvalued at present” and it was aiming for the three-month Libor at “as close to zero as possible”.

“The current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland,” the SNB said, adding it would take further measures if necessary.

In addition to lowering interest rates, the bank said it would significantly increase the supply of francs to the money market over the next few days and would embark on a process to expand the bank’s sight deposits (immediately accessible deposits) by SFr50 billion ($64.35 billion).

Following the announcement on Wednesday, the euro jumped two per cent to SFr1.108, while the dollar rose 1.4 per cent to SFr0.7763.

Pressure

The SNB action follows the continued appreciation of the franc against major currencies as the global economy has continued to falter this year.

The eurozone and the United States in particular have seen their currencies struggle under the combined weight of government debt and lacklustre economic growth.

On Monday, the Swiss franc achieved record highs against the dollar, British pound and the euro, with analysts increasingly worried the franc could reach parity with the euro in the near future.

In Switzerland, calls for action to counter the strong franc had become increasingly shrill with tourism workers and exporters feeling the heat.

“This is wonderful,” said chief executive of Swatch Group Nick Hayek following the bank’s announcement. “Speculators should brace themselves.”

The SNB said it had acted because the global economic outlook had worsened since its last policy assessment in June.

“At the same time the appreciation of the Swiss franc has accelerated sharply during the last few weeks. Consequently the outlook for the Swiss economy has deteriorated substantially,” the bank’s statement read.

Cautious reaction

Market analysts reacted positively, if somewhat cautiously, to the bank’s move, saying the SNB was sending a strong signal to financial markets.

“It is a strong gesture: the National Bank is doing something targeted,” said economist Janwillem Acket of Julius Bär. “You can’t keep the target rate on hold forever in this situation. This move makes absolute sense.”

Adrian Schmidt of Lloyds Banking Group said the measures would help to “calm down” the markets’ rush to buy up francs.

“The market had gone too far in one direction and it now has to think about whether it wants to hold the Swiss franc,” Schmidt said.

Fabian Heller of Credit Suisse said that with the interest rate cut and the increase in liquidity the SNB had taken steps that were available to it. “They are doing what they can,” he said.

Questioning the impact of the move over the longer term, analysts suggested the SNB could again be forced to intervene in currency markets if the franc continued to appreciate.

Between 2009 and 2010, the SNB embarked on a massive campaign to buy up euros in an effort to stabilise the franc – a move that was heavily criticised for being ineffective and which resulted in heavy losses for the bank as the euro continued to depreciate.

“Currency intervention is now a potential threat once more,” said Schmidt.

“The SNB will be reluctant to intervene in the currency markets again… However maybe the threat of intervention will force people to look for other safe havens.”

Acket said the slowing of the Swiss economy could also help to reduce the attractiveness of the franc for investors.

“It remains to be seen how successful [the bank’s measures] will be as long as the market sees Switzerland as so much better off than the rest of the world,” Acket said.

Regarding the danger of parity with the euro, Acket said, “If the markets want that, they will test it”.

www.swissinfo.ch and agencies