Thursday 23 March 2017

Swiss make surprise rate cut to curb 'overvalued' currency

currencies

Klaus Wille

The Swiss central bank unexpectedly cut interest rates yesterday and said it will increase the supply of francs to money markets to curb the "massively overvalued" currency.

The Swiss National Bank (SNB) lowered its target for the three-month Libor to "as close to zero as possible" from 0.25pc.

The Zurich-based central bank said it would also expand banks' sight deposits, or cash which can be withdrawn on demand, to 80 billion Swiss francs (€73bn) from 30 billion francs and repurchase outstanding SNB Bills, according to an emailed statement yesterday.

The franc, considered a haven in times of turmoil, has surged 10pc against the euro over the past two months as Europe's debt crisis worsened, hurting Swiss exports and economic growth.

The SNB joins the US Federal Reserve and the Bank of Japan, which have also cut their benchmark rates to near zero in an effort to boost their economies.

"It will only temporarily stop the franc from appreciating," said Sebastian Wanke, an economist at Dekabank in Frankfurt. "For the franc to weaken, uncertainty has to leave the markets."

Intervention

The Swiss currency depreciated as much as 3pc after the announcement and traded at 1.10261 versus the euro in Zurich after reaching a record 1.07958 earlier yesterday.

That's still stronger than this week's low of 1.14520 on Monday.

Against the dollar, the franc fell to 77.10 centimes from 76.22 centimes yesterday.

The move reverses the liquidity-absorbing measures the SNB put in place last year to slowly withdraw the monetary loosening employed during the global financial crisis.

"With this drastic decision, the Swiss National Bank has completed a surprising about-face," said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt.

"The exit from unconventional policy has been suspended and rate increases pushed far into the future. For that reason we would no longer rule out direct currency intervention."

The Bank of Japan also expressed increased concern about its currency's strength this week as the nation recovers from a March earthquake and tsunami. Finance Minister Yoshihiko Noda said yesterday that Japan would aim for "maximum effect" in any intervention to weaken the yen. (Bloomberg)

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