(MENAFN- AFP) Switzerland's central bank on Thursday scrapped a three-year bid to hold down the value of its currency against the euro, in a shock announcement that set off panic in the markets.
Minutes after the bank said it was abandoning the minimum rate of 1.20 francs against the euro, the safe haven Swiss currency strengthened almost 30 percent to 0.8517 against the common European currency.
Fearful that a strong franc could dent earnings as it makes local products more expensive, investors dumped Swiss stocks, wiping out some 12 percent in market capitalisation.
The impact was felt as far as in Poland, where 700,000 mortgages are denominated in the franc. The zloty lost a fifth of its value against the Swiss currency, making it even more expensive for Polish homeowners to repay their loans.
"Markets are clearly in panic mode," IG analyst Andreas Ruhlmann said, adding that he expected the central bank to rapidly shift strategies "to a new one which will better represent the real market conditions."
Swiss business leaders called the central bank's decision a disaster, with banking giant UBS saying it would lead to a drop of 5 billion francs worth of exports and knock 0.7 percentage points off overall output growth.
"I am at a loss for words," Swatch group's boss Nick Hayek told news agency ATS. "What the SNB has sparked here is a tsunami."
The Swiss watchmaking giant was among top losers on the stock market, with its shares sinking 15 percent while those of the world's second largest luxury group Richemont plummeted more than 14 percent.
- Swiss bombshell -
The SNB had since September 2011 been defending the exchange rate floor in a bid to protect the country's vital export and tourism industries, even buying massive quantities of foreign currencies to do so.
The rate was introduced as the eurozone crisis sent investors scurrying to the safe haven currency. More recently, the Russian ruble crisis put renewed pressure on the franc.
But the bank, which less than a month ago vowed to enforce the exchange rate floor "with the utmost determination", said Thursday it was no longer needed.
"The minimum exchange rate was introduced during a period of exceptional overvaluation of the Swiss franc and an extremely high level of uncertainty on the financial markets," the bank said.
"While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation," the bank added.
But analysts and investors were stunned by the bank's decision.
Berenberg analyst Christian Schulz called it a "Swiss bombshell" while Alpari analyst James Hughes said it would wreck havoc not only on currency markets but also equity markets.
"We suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro," said Jennifer McKeown, senior European economist at Capital Economics.
To make the franc less attractive, the central bank also announced Thursday it was pushing its interest rate further into negative territory -- slashing it by 0.5 percentage points on certain bank deposits to negative 0.75 percent.
The target range for Libor -- the franc's three-month London interbank offered rate -- is now between -1.25 and -0.25 percent, down from between -0.75 and 0.25 percent.
But analysts were not convinced.
"Negative interest rates are unlikely to be as effective as the massive currency interventions that the bank has undertaken in the past" to defend the floor, said McKeown.
Market players also said Bern's move may have come at this time because it is expecting the European Central Bank to launch a massive quantitative easing programme -- which would make defending the franc too costly.
The ECB is meeting on January 22, and is widely seen to launch a controversial programme of large-scale government bond purchase in a bid to keep the bloc from sinking into deflation.
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