SNB Abandons Key Policy Tool as Jordan Goes for Shock Factor
In a surprise statement that sent shockwaves through equities and currency markets, the central bank ended its cap of 1.20 franc per euro and reduced the interest rate on sight deposits, deepening a cut announced less than a month ago.
The shift marks an attempt by the SNB to reinforce its defenses of the economy before government bond purchases by the European Central Bank that could crumple the franc cap. The currency surged after the announcement, Swiss stocks including UBS AG tumbled and the chief executive of watchmaker Swatch Group AG said the policy shift would hurt exports. SNB President Thomas Jordan defended the move, saying surprise was necessary.
“It’s amazing that such a stoic central bank could end up abandoning such a long held policy with such short shrift,” said George Buckley, an economist at Deutsche Bank AG in London. “I thought we were out of the situation where central banks surprise so significantly as this.”
With reverberations hitting everyone from currency traders in London to mortgage holders in Poland, economists responded to the SNB announcement with comments including “surprise” and “seismic.” Coming from a nation that has attracted investors for its stability, the change captures the scale of the battle policy makers have repeatedly faced going back decades to rein in a currency popular with investors at times of crisis.
BlindsidedNone of 22 economists surveyed by Bloomberg News between Jan. 9 and Jan. 14 expected the SNB to get rid of its cap in 2015. Only four saw it abandoning the measures next year.
The franc appreciated as much as 41 percent to 85.17 centimes per euro, the strongest level on record, according to data compiled by Bloomberg. At 4:40 p.m. in Zurich, the franc had given up some of those gains to trade at 1.05478 per euro. Against the dollar, it was up 11 percent at 90.74 centimes.
Switzerland’s benchmark SMI index declined 9 percent, with Swatch dropping 16 percent and Holcim Ltd., the world’s biggest cement maker, plunging 10 percent.
Ripples from the decision spread around the world. Amid strains on the infrastructure for the $5.3 trillion-a-day foreign-exchange market, Deutsche Bank AG was among the dealers to suffer disruptions to electronic trading.
In Eastern Europe, currencies and banking stocks slumped on concern individuals in countries including Poland and Hungary may struggle to repay loans denominated in francs.
Necessary Surprise“The decision has been a surprise for markets -- you can’t do it in any other way,” SNB President Jordan told reporters in Zurich today. “We came to conclusion that it’s not a sustainable policy.”
The change comes just one week before ECB policy makers meet to discuss new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro.
The SNB spent billions defending the cap after introducing it in September 2011. Jordan said today it may intervene again.
“The SNB doesn’t see any future any more for their floor with the strong U.S. dollar and the QE ahead at the ECB,” said Alessandro Bee, strategist at Bank J Safra Sarasin AG in Zurich.
In the 1970s, when the Swiss were also battling a strong franc, the government imposed negative interest rates on assets held by foreigners. When that proved ineffective, the SNB imposed a ceiling on the franc versus the German mark.
SNB LossesMore recently, the SNB, then led by Philipp Hildebrand, spent billions of francs on spot market interventions. As a result, it ran up a 19 billion-franc book loss for 2010, resulting in calls for Hildebrand to resign. Chiefly due to its currency-market interventions, it held a record 495.1 billion francs of foreign currencies as of late last year.
To complement the lower deposit rate, the SNB also moved the target range for the three-month Libor to between minus 1.25 percent and minus 0.25 percent, from the current range of between minus 0.75 percent and 0.25 percent.
“It may show that the SNB doesn’t want to widen its balance sheet any more,” said Maxime Botteron, economist at Credit Suisse Group AG in Zurich.