Switzerland’s central bank is scrapping a policy that kept a limit on how much the euro could fall against the Swiss franc, arguing it is no longer justified in light of the euro’s recent decline in global markets.
The unexpected decision to ditch the policy – which ensured the euro did not fall below 1.20 francs – sent the euro plummeting 28% against the Swiss currency, to 0.8946 francs.
The minimum exchange rate was introduced in September 2011 in an attempt to halt the rise of the franc – a traditional safe-haven currency for investors - against the euro at a time when the eurozone debt crisis was at its height. The strong franc was particularly problematic for Swiss exporters, who were forced to drastically cut their prices to remain competitive.
“This exceptional and temporary measure protected the Swiss economy from serious harm,” the Swiss National Bank said in a statement.
However, the central bank said it has now “concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified”.
It said the effective euro peg meant that the Swiss franc recently weakened against the dollar as a result of the euro’s significant fall against the US currency. It noted that the franc’s “overvaluation has decreased as a whole” since the minimum exchange rate was introduced.
The national bank said it would also lower its average interest rate to minus 0.75% from minus 0.25%.
Lower rates can help an economy and also weaken the national currency, something analysts say will help now that the Swiss national bank has scrapped its policy limiting the strength of the franc against the euro.