On January 15, 2015, at 12:30 MSK, the Swiss National Bank (SNB) announced an unexpected change in the three-month LIBOR rate and the removal of the Swiss franc’s peg to the euro at 1.20, outside of its regular meetings.
Swiss National Bank (SNB)
According to a press release published on the bank’s website, the SNB will no longer support the lower bound for the EUR/CHF currency pair at 1.20. At the same time, the deposit rate was reduced to -0.75% from -0.25%. This shift moves the LIBOR rate range to between -1.25% and -0.25%, compared to the previous range of -0.75% to 0.25%.
The SNB explained that the minimum exchange rate provided time for the Swiss economy to adapt to difficult economic conditions. The current decision is justified by the ongoing divergence in monetary policies among major global currencies. The euro has significantly weakened against the dollar, which in turn caused the Swiss franc to weaken against the US dollar. In this context, the SNB concluded that maintaining the minimum exchange rate for the Swiss franc against the euro was no longer appropriate.
The reduction in interest rates was driven by the fact that removing the minimum exchange rate would have tightened monetary conditions, which the SNB needed to keep stimulative. As stated in the regulator’s message, it will continue to monitor the foreign exchange market when forming its future monetary policy. The central bank also reserves the right to intervene in the foreign exchange market if necessary.
After the Swiss National Bank’s decision, the Swiss franc received significant support from buyers on the Forex market. According to analysts from ForTraders.org, the EUR/CHF and USD/CHF currency pairs fell by 25%. The situation has slightly stabilized at the moment.
FAQ
Why did the Swiss National Bank cut rates to -0.75%?
The SNB cut rates to maintain stimulative monetary conditions after dropping the euro peg, which could have otherwise tightened financial conditions.
What happened to the Swiss franc after the SNB’s decision?
The Swiss franc gained significant support from forex traders following the announcement, leading to sharp declines in EUR/CHF and USD/CHF.
Why did the SNB remove the euro peg?
The SNB decided the euro peg was no longer appropriate due to the divergence in global monetary policies and the weakening of the euro against the dollar.
