The Swiss National Bank has announced a shock cut in interest rates to try to stop investors buying the country’s currency, which is seen as a safe haven in times of economic turmoil.
The central bank has called the franc “massively overvalued” and plans to cut its target rate to “as close to zero as possible” from an already rock-bottom 0.25 percent. It will also significantly increase the supply of francs to the money market.
“The SNB is keeping a close watch on developments on the foreign exchange market and will take further measures against the strength of the Swiss franc if necessary,” the bank said.
The euro shot up in response, gaining 2.5 percent on the day versus its Swiss counterpart after hitting a new record low before the SNB news. The dollar also rose sharply. But analysts said that trend could prove temporary.
With low-debt Switzerland seen as a refuge for investors from an escalating euro zone debt crisis and fears of a US rating downgrade, the franc has surged 18 percent against the euro and 22 percent against the dollar in recent months.
Swiss exporters have called on both the SNB and the government to take action against its steep rise although the bank has also been criticised for the heavy losses it incurred in its post-crisis interventions in 2009 and 2010.
Nick Hayek, chief executive of watch maker Swatch, who has been one of the most outspoken about the impact of the strong franc, welcomed the SNB move. “This is wonderful,” he said.