Swiss central bank scraps minimum linkup with euro
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January 15, 2015 12:00 AM

Swiss central bank scraps minimum linkup with euro

Sophie Baker
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    The Swiss National Bank, the central bank for Switzerland, abandoned its minimum exchange rate vs. the euro due to a weakened value against the dollar as a result of increased monetary policy divergence, said Thomas Jordan, chairman of the governing board of the SNB.

    At a news conference Thursday, Mr. Jordan said the minimum exchange rate of 1.20 Swiss francs per euro had been discontinued effective immediately.

    “The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc (in 2011) and an extremely high level of uncertainty in the financial markets,” Mr. Jordan said. “This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate.”

    However, Mr. Jordan added that recent monetary policy divergence of major currency areas has “increased significantly — a trend that is likely to become even more pronounced.”

    “The euro has depreciated substantially against the U.S. dollar and this, in turn, has caused the Swiss franc to weaken against the U.S. dollar. In these circumstances, the SNB has concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” Mr. Jordan said.

    As of Wednesday, prior to the announcement, the closing exchange rate was 1.02 Swiss francs per dollar. On Thursday, the exchange rate was 0.89 Swiss francs per dollar, with the franc appreciating following the news.

    Mr. Jordan also announced a 0.5-percentage-point reduction in interest rates, to -0.75%, effective Jan. 22.

    “Today’s move by the Swiss National Bank was unexpected by everyone,” said Andrew Parry, CEO of Hermes Sourcecap, which is part of Hermes Investment Management’s multiboutique business, in a statement. “We still live in a system that is vulnerable to shocks that will be amplified by the near-zero interest (rate) policies that most central banks have adopted. Inevitably, this will continue to distort capital allocation decisions in business and finance and make asset prices sensitive to small changes in perception on the outlook for variables such as growth, inflation and rates.” Mr. Parry added that it should also help to underpin financial assets, “albeit with higher volatility.”

    “This action seems to be a pre-emptive response to the now increasingly expected move in European Central Bank policy to launch a quantitative easing program,” said Salman Ahmed, global strategist at Lombard Odier Investment Management, in a statement. “Further easing by the ECB would have meant an even stronger impulse for the SNB to buy euro assets leading to a significant increase in the balance sheet from an already bloated 85% of GDP.”

    Managers said the SNB has regained its flexibility to run its own monetary policy by scrapping the exchange-rate floor and will not be affected by choices made by the ECB.

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