Trade Desk Thoughts: The Swiss National Bank (SNB) cut its main policy rate by 25 basis points to 0.25% today, bringing its total reduction since the start of the financial crisis to 250 basis points.
The Swiss franc declined sharply against the major currencies after the bank said it would intervene to stop its appreciation. USD/CHF rose over 300 pips after the announcement.
Decisive action is thus called for, to forcefully relax monetary conditions, the central bank said.
SNB Vice-President Philipp Hildebrand said on Jan. 21 that the central bank could intervene in currency markets at fixed exchange rates if necessary to prevent a renewed appreciation of the franc. The currency has gained against the major currencies in the last several months, making exports less competitive.
Switzerland is facing its worst recession since at least 1982, according to the central bank.
With deflation a real threat and the economy slowing sharply, the bank needs to implement unconventional monetary policy, said Matthew Carniol, chief currency strategist at TheLFB-forx.com. Swiss companies have said that their competitiveness has been damaged by the franc’s gain on the euro.
The SNB would increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange market, the central bank said.
Officials said the Swiss franc's recent rise was leading to inappropriate tightening of conditions and therefore the central bank would start buying foreign currencies to prevent a further appreciation against the euro.
Forex Technical Reaction: USD/CHF rose from 1.1560 to 1.1900 immediately after the announcement.