Switzerland’s central bank (SNB) surprised the markets by introducing an unconventional monetary policy decision, having cut its interest rate to —0.25%, starting January 22. The measure will weaken the franc by triggering money losses in financial institutions holding the currency.
However, Switzerland has experienced a sudden influx of money in recent days, leading to the franc’s sudden strengthening. The investment inflow was possibly triggered by the ruble crisis, prompting an acceleration of money outflow from Russia. Many Russians might be trying to shelter their money in Switzerland.
This situation caused the franc to sharply strengthen from 1.2009 against the euro to 1.2093 overnight on December 18. After the SNB announcement the franc fell 0.5% to 1.2075 per euro.
The negative SNB interest rate will prompt a sell-off in franc-denominated assets, effectively driving the franc’s FX rate down early next year.