The Swiss National Bank (SNBN) scrapped its minimum exchange rate today, abandoning a tool policy makers said just days ago was necessary to ward off deflation.

The central bank ended its three-year-old cap of 1.20 franc per euro and reduced the interest rate on sight deposits, deepening a cut announced in December. The latest move marks an attempt by the SNB to reinforce defenses before government bond purchases by the European Central Bank.

The change comes just one week before ECB policy makers meet to discuss introducing new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro. As a small, export-oriented economy with a big banking sector, Switzerland has repeatedly grappled with how to rein in a currency popular with investors at times of crisis.

The central bank has already spent billions defending the cap after introducing it in September 2011. SNB Vice President Jean-Pierre Danthine said in comments broadcast Jan. 13 that the 1.20 ceiling would remain a “pillar” of monetary policy, while on Jan. 5 President Thomas Jordan termed it “absolutely central.”

Not one of 22 economists surveyed by Bloomberg News between Jan. 9 and Jan. 14 expected the SNB to get rid of its cap in 2015. Only four saw it abandoning the measures next year.

On Dec. 18, the SNB announced the introduction of a negative deposit rate of minus 0.25 percent to supplement its franc ceiling, citing the need to stem a tide of money flowing from Russia’s financial crisis. The measure was to take effect on Jan. 22, the day of the ECB’s next policy decision.

“The SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” it said in a statement today.

Source:

http://www.bloomberg.com/news/2015-01-15/snb-unexpectedly-gives-up-cap-on-franc-lowers-deposit-rate.html