The decision of the Swiss National Bank to stop protecting the exchange rate of Swiss franc to euro against excessive appreciation was a total surprise. In such a situation, the market reacted very impulsively, feverishly looking for a new balance course after the sudden emergence of possibilities to actualize it. Today, the scope of fluctuation of exchange rates is several orders of magnitude bigger than it would be in a normal situation.
The shock on the market is so significant, that it has also had a negative impact on shares – for example, the WIG20 index on the Warsaw Stock Exchange suddenly started to lose as much as 2.5 percent of its value. This may also result from such a fluctuation causing an automatic closing of many investors’ positions. In order to complete safety deposits, some of them had to sell their assets, even if it led to losses. As a consequence, the shock spread to other markets. However, its effects should be short-term and the situation should calm down hour by hour.
All this, however, is not occidental – rather a direct result of action consciously taken by the Swiss National Bank. One can wonder why it elected to take such a surprising step without prior consultation with other central banks and suggesting that it intended to radically alter the course of its monetary policy. It seems that the SNB did in fact want to cause a shock on the monetary market – possibly in order to eliminate some investors, who took advantage of the previous situation and engaged in the so-called carry trade, from the market. Carry trade was made possible thanks to the anomalously stable monetary rate and interest rate disparity. However, one should not expect such a shock to deter most market players from trading Swiss francs
Switzerland will also suffer as a consequence of its central bank’s decision. The competitiveness of its export, a factor on which a significant portion of the country’s national income depends, will rapidly decrease. SNB will have to combat excessive strengthening of the Swiss franc in one way or another. Interest rates have been cut yet again – the main rate is now at a level of -0.75 percent, which should serve as long-term deterrent for those willing to invest assets in Swiss francs.
These developments are understandably a cause of nervousness among borrowers who pay their credits back in Swiss francs. The value of their obligations converted to Polish złoty may increase rapidly, causing higher credit installments and an increase in the value of the credit in relation to current real estate prices. If their LTV index exceeds 100 percent, banks may demand additional securities for the credit which may no longer be covered with the value of the real estate itself. On the other hand, a decrease in interest rate should contribute to restricting the of potential growth in the value of credit installment. One should also keep in mind that the situation is very dynamic and it is currently hard to assess, the extent to which SNB’s decision will harm those who pay their credit back in Swiss francs.
The markets reacted with panic. A new balance will gradually emerge out of the resulting chaos – now it is impossible to anticipate what the exchange rate for Swiss franc to euro or złoty will represent this balance.
Łukasz Kozłowski, expert of Employers of Poland