In its quarterly rate decision, the Swiss National Bank decided to leave its policy unchanged: the Libor Rate remains unchanged between 0% to 0.25%, and the floor of 1.20 under EUR/CHF remains unchanged.
There were rumors that the floor would be lifted to 1.22. This could still happen in the future, as inflation estimations were lowered.
The SNB initiated the 1.20 floor under EUR/CHF in September 2011, in a shocker move. The SNB pledged to buy unlimited quantities of foreign currency in order to keep this level, and that’s exactly what it did.
After an initial period when the cross traded in a range above 1.20, EUR/CHF flatlined as the European debt crisis intensified. The SNB was quite lonely in buying euros for a long time.
This changed after EUR/USD rallied recently: Mario Draghi’s OMT and the higher expectations for QE3 in the US pushed EUR/USD higher, and also SNB could breath a sigh of relief: EUR/CHF managed to rise above the floor and even cross 1.2150 for a short time. Also rumors about raising the floor pushed the pair higher recently.
The goal was to fight deflation and to aid Swiss exports. Prices are still falling in Switzerland, and fresh forecasts are lower: prices are expected to fall by 0.6% in 2012 and rise by only 0.2% in 2013. This is lower than projected. Also growth estimates have been lowered: 1% instead of 1.5% for 2012.
EUR/CHF is now at 1.21 following the decision, that put an end to rumors. However, if deflation persists and the euro will continue recovering, the SNB could raise the floor more easily, either officially or unofficially.
For more on the franc, see the Swiss franc forecast.
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