Franc Plunges From Records as Swiss Central Bank Unexpectedly Lowers Rate

By Klaus Wille - Aug 3, 2011 7:01 AM CT

The Swiss central bank unexpectedly cut interest rates and said it will increase the supply of francs to money markets to curb the “massively overvalued” currency. The franc dropped from a record.

The Swiss National Bank lowered its target for the three- month Libor to “as close to zero as possible” from 0.25 percent. The Zurich-based central bank said it will also expand banks’ sight deposits, or cash which can be withdrawn on demand, to 80 billion Swiss francs ($104 billion) from 30 billion francs and repurchase outstanding SNB Bills, according to an e-mailed statement today.


The franc, considered a haven in times of turmoil, has surged 10 percent against the euro over the past two months as Europe’s debt crisis worsened, hurting Swiss exports and economic growth. The SNB joins the U.S. 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.”

The Swiss currency depreciated as much as 3 percent after the announcement and traded at 1.10261
versus the euro at 1:45 p.m. in Zurich after reaching a record 1.07958 earlier today. That’s still stronger than this week’s low of 1.14520 on Aug. 1. Against the dollar, the franc fell to 77.10 centimes from 76.22 centimes yesterday.

Intervention

Today’s 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 today that Japan would aim for “maximum effect” in any intervention to weaken the yen.
Brazil’s central bank has taken action to weaken the real, with Finance Minister Guido Mantega saying this week that the government will continue to adopt measures to curb currency gains.

Debt Crises

The franc has been pushed higher by increasing investor concern that debt crises in Europe and the U.S. will hurt growth. President Barack Obama yesterday signed into law a plan to lift the nation’s borrowing limit and cut spending following months of political wrangling. In the 17-member euro region, leaders last month pledged a second bailout package for Greece in an attempt to prevent a default and halt contagion to Italy and Spain.
Switzerland is a favorite of investors partly because of its current-account surplus, the broadest measure of trade, which means it doesn’t need to rely on foreign capital to fund a trade deficit like the U.S. The Swiss government on June 30 forecast budget surpluses in every year through 2015.

‘Global Growth Fears’

“Increasing global growth fears and the never-ending euro- region debt crisis keep the demand for safe havens high,” said Alexander Koch, an economist at UniCredit Group in Munich. “The decisive rhetoric of the SNB could help to stabilize the currency.”
The SNB said the “global economic outlook has worsened” since its last rate meeting in June. “At the same time, the appreciation of the Swiss franc has accelerated sharply during the last few weeks,” it said. “Consequently, the outlook for the Swiss economy has deteriorated substantially.”

Policy makers, led by Philipp Hildebrand, are “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 SNB said.
Exports account for about half of Swiss gross domestic product. Swiss chemicals maker Lonza Group AG on July 27 reported a drop in first-half profit and said earnings are “under substantial pressure” following the franc’s ascent. Swatch Group AG (UHRN) Chief Executive Officer Nick Hayek told SonntagsZeitung in an interview published on July 31 that the franc is hurting earnings.

‘Symbolic Step’

The Swiss economy is showing signs of slowdown. The KOF leading indicator dropped for a third month in July, investor confidence fell to the lowest in 2 1/2 years and a consumption indicator slipped in June.

The SNB, which was scheduled to make its next rate decision on Sept. 15, lowered its Libor target range to zero percent to 0.25 percent from zero percent to 0.75 percent.
“The SNB showed strong commitment today and that will have an effect on markets,” said Fabian Heller, an economist at Credit Suisse Group AG in Zurich. “It’s also a symbolic step. They’re signaling that they will no longer be a bystander.”