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Update: Switzerland scraps euro rate cap, shocking markets
[GENEVA] Switzerland's central bank said on Thursday it was ending a three-year bid to hold down the value of its currency against the euro, in a surprise announcement that sent stocks plunging and the franc soaring almost 30 per cent in minutes.
The bank said it would no longer maintain the minimum rate of 1.20 francs against the euro as its currency was no longer massively overvalued and Switzerland's export-intensive economy has had time to adjust.
But immediately after the announcement, the Swiss franc strengthened 29 per cent to 0.8517 against the euro, and also soared significantly against the dollar to 1.1362.
Fearful that a strong franc could dent earnings as exports became more expensive, investors dumped Swiss stocks, sending them plunging more than 12 per cent.
Swiss watchmaking giant Swatch saw its share price slump 15 per cent, while shares in the world's second largest luxury group Richemont plummeted more than 14 per cent.
"Markets are clearly in panic mode," IG analyst Andreas Ruhlmann said, adding that he expected the central bank to rapidly shift strategies "to a new one which will better represent the real market conditions."
The SNB had since September 2011 been defending the exchange rate floor in a bid to protect the country's vital export industry, including by buying massive quantities of foreign currencies.
The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis has once again put pressure on the franc.
The bank, which less than a month ago vowed to enforce the exchange rate floor "with the utmost determination", said Thursday it was no longer needed.
"The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets," the bank said.
"This exceptional and temporary measure protected the Swiss economy from serious harm," it said.
"While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation," the bank added.
But analysts and investors were stunned by the bank's decision.
Berenberg analyst Christian Schulz called it a "Swiss bombshell" while Alpari analyst James Hughes said the reaction to the annnouncement is "likely to wide reaching and cause a huge issue in terms of not just currency markets but equity markets as well".
"We suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro," Capital Economics said.
To make the franc less attractive, the central bank on Thursday also announced it was pushing its interest rate further into negative territory - slashing it by 0.5 per centage points on certain bank deposits to negative 0.75 per cent.
The target range for Libor - the franc's three-month London interbank offered rate - is now between -1.25 and -0.25 per cent, down from between -0.75 and 0.25 per cent.
But analysts were not convinced.
"Negative interest rates are unlikely to be as effective as the massive currency interventions that the bank has undertaken in the past" to defend the floor, Capital Economics said.