Adding more volatility to an already volatile FX market, the Swiss National Bank (SNB) has taken the drastic step of introducing negative interest rates, in a furtherance of its attempts to halt the rise in the Swiss Franc versus the Euro and defend its EURCHF 1.20 cap.
The SNB is imposing an interest rate of –0.25% on sight deposit account balances above 10 million Swiss Francs at the SNB, with the aim of taking three-month Libor into negative territory.
The Franc has been steadily appreciating against the Euro over the past few weeks (see graph below), as expectations build for further quantitative easing by the ECB in 2015.
Beyond defending the 1.20 cap, the SNB is trying to minimize deflation risk, as well as defend Swiss exports which would be hit were the Franc to appreciate beyond 1.20.
Apparently the SNB has decided it can’t defend EURCHF 1.20 just by intervention.
The move caused a near-immediate 70 pips move in the EURCHF rate this morning, back toward the 1.21 level.
EURCHF one year chart. Source: XE.com.
The SNB’s statement on its introduction of negative interest rates can be seen here.