Swiss franc: a look back at the end of the EUR/CHF floor in 2015
The abandonment of the EUR/CHF exchange rate floor, which came as a sudden surprise on 15 January 2015 following an announcement by the Swiss National Bank (SNB) that took the economic world by surprise, is a particularly significant event in Switzerland’s monetary history in recent years. We take a closer look at this bombshell announcement, the consequences of which are still being felt in Switzerland today.
• The EUR/CHF floor, introduced by the SNB in 2011, set a minimum rate of CHF 1.20 per euro to prevent excessive appreciation of the franc.
• The SNB suddenly abandoned this floor on 15 January 2015, triggering panic in the markets and disbelief across the Swiss business community.
• The decision was justified by the euro's depreciation against the dollar and growing tensions between major central banks' monetary policies.
Find out what the EUR/CHF floor between the euro and the Swiss franc entailed, why the SNB abandoned it in 2015, and the consequences of this major event for the markets as well as for Swiss businesses and their employees.
What was the EUR/CHF floor?
Introduced on 6 September 2011 by the Swiss National Bank (SNB), the EUR/CHF floor was a minimum exchange rate between the Swiss franc (CHF) and the euro (EUR), under which 1 euro could, in theory, no longer be worth less than 1.20 Swiss francs.
Following a lengthy period of appreciation of the Swiss currency (at a time when the Swiss franc was being used as a safe-haven asset at the height of the eurozone sovereign debt crisis), the SNB had decided to introduce this exchange rate floor in order to prevent its national currency from becoming excessively overvalued.
And rightly so: an overly strong currency has numerous negative consequences for a country’s economy, since it notably penalises exports. The SNB had therefore decided to buy foreign currencies on a massive scale in order to curb the appreciation of the Swiss franc…
The end of the EUR/CHF floor in 2015
The facts
Having maintained the floor rate of 1 euro to 1.20 Swiss francs for almost three and a half years, the SNB suddenly abandoned it on Thursday 15 January 2015, at around 10.30 am, triggering not only panic on the financial markets but also incomprehension and anger within Swiss business circles.
And rightly so: just three days earlier, on Monday 12 January, the Swiss institution had, through its vice-chairman Jean-Pierre Danthine, reaffirmed its determination to defend this famous floor rate.
Why was the EUR/CHF floor abandoned?
To justify this surprise decision, SNB Chairman Thomas Jordan pointed to a logical choice resulting from an in-depth review of the Swiss institution’s balance sheet. According to the SNB’s governing bodies, while the Swiss franc did remain at a relatively high level, its overvaluation had largely been contained by the introduction of the floor rate in previous years.
Jordan also pointed to the recent sharp depreciation of the euro against the US dollar, which was inevitably leading to a depreciation of the Swiss franc against the greenback. Combined with the difficulties facing the SNB owing to the widening gaps between the monetary policies of the major European central banks (gaps set to widen further as part of the European Central Bank’s debt purchasing programme), this depreciation is thought to have precipitated the Swiss institution’s decision.
In addition, in order to limit any unwelcome tightening of monetary conditions, the SNB immediately decided to cut the interest rate on sight deposit account balances exceeding a certain exempt threshold by half a percentage point, to -0.75% (from -0.25% initially).
The consequences of the end of the EUR/CHF floor
Immediate consequences
The SNB’s announcement on 15 January 2015 hit the financial markets like a bolt from the blue. Although many observers had expected such a decision sooner or later (as the EUR/CHF floor could not be maintained indefinitely), no one had imagined it would be taken so suddenly and without any prior warning!
The market’s reaction was immediate and brutal: the euro, which had still been worth 1.20 Swiss francs shortly before the SNB’s announcement, plunged rapidly to a record low of 0.9652 francs, before stabilising by the end of the day at around 1.04 francs.
At the same time, the Swiss stock market fell sharply: the SMI index, which tracks the country’s 20 largest listed companies by market capitalisation, closed the session down 8.67%, at 8,400 points.
Finally, in the hours following the announcement of the end of the EUR/CHF floor, many Swiss citizens and cross-border commuters who had bought euros in bulk rushed to currency exchange bureaux to reverse their transactions – to the point that some bureaux were forced to temporarily suspend all euro withdrawals to avoid a system overload.
Longer-term consequences for the Swiss economy
Beyond the immediate adverse consequences of scrapping the floor rate between the euro and the Swiss franc, the SNB’s decision created numerous longer-term difficulties, for Swiss businesses and employees alike.
Firstly, it brought about a significant loss of competitiveness for Swiss exporting companies. Such companies are numerous in a country that relies heavily on foreign trade (watchmaking, luxury goods, industry, the banking and financial sector, and so on); they saw the price of their products and services rise by close to 30% within the space of a single day, and consequently suffered a major loss of competitiveness…
At the same time, Switzerland’s appeal to foreign investors was significantly affected: setting up a subsidiary in Switzerland became far more costly, owing to the strong valuation of the Swiss franc, than it had been in the days of the EUR/CHF floor.
Furthermore, while the event may initially have appeared to benefit cross-border commuters (whose purchasing power rose markedly), they too faced consequences that were, to say the least, unwelcome; Swiss companies, squeezed by an overly strong franc, were consequently forced to scale back hiring, or even lay off staff.
Likewise, some mortgage borrowers, who were highly exposed to currency risk, ended up owing a debt in Swiss francs greater than the value of their property in euros!
Damaging and very real economic consequences, directly caused by the adverse movement in the EUR/CHF exchange rate, which only a few players managed to limit thanks to their currency risk reduction strategies.
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