The Swiss franc has risen by 30% in chaotic trade after the central bank abandoned the cap on the currency’s value against the euro.
The Swiss National Bank (SNB) said the cap, introduced in September 2011, was no longer justified.
It also cut a key interest rate from -0.25% to -0.75%, raising the amount investors pay to hold Swiss deposits.
The IMF’s head, Christine Lagarde, called the move “a bit of a surprise”.
Christine Lagarde said she was also surprised that the governor of the Swiss National Bank had not contacted her, and said she hoped he had communicated the plan to his fellow central bank governors.
Following the SNB move the euro went from buying 1.20 francs to buying just 0.8052, but it later recovered to buy 1.04.
Swiss shares closed down 9% and stock markets around Europe fell with investors buying “safe haven” assets such as gold and German bonds.
Many investors believe that with the franc so strong Swiss companies will struggle to maintain export levels.
Watchmaker Swatch saw its share price slump 15%. Swatch chief executive Nick Hayek called the decision “a tsunami” for Switzerland’s economy.
Mark Haefele, chief investment officer of Swiss bank UBS, estimated that the move would cost Swiss exporters close to 5 billion Swiss francs, equivalent to 0.7% of Swiss economic output.
One trader described trading after the unexpected announcement as “carnage”.
While the Swiss franc was held at 1.20 to the euro it had tracked the euro’s fall against the dollar.
Many believe the euro will fall even further if the European Central Bank (ECB) starts quantitative easing, buying bonds to push cash into the eurozone banking system to stimulate a recovery.
Keeping the franc at 1.20 to the euro had became increasingly expensive for the SNB as it sold its own currency and bought up euros, sterling, US and Canadian dollars and yen, usually in the form of government bonds.
SNB foreign currency reserves have more than doubled since the cap was started in 2011 making it one of the five largest holders of foreign reserves in the world.
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The Swiss National Bank will bring in a negative interest rate cutting the value of large sums of money left on deposit in Switzerland.
SNB is imposing a rate of minus 0.25% on “sight deposits” – a form of instant access account – of more than 10 million Swiss francs ($9.77 million).
It is trying to lower the value of the Swiss franc, which has risen recently.
Russia’s market meltdown and a dramatic plunge in the oil price have led investors to seek “safe havens”.
The announcement sent the franc lower, and in early trading the euro was buying 1.201 Swiss francs, fewer than the 1.203 it was worth before the news, just within the target.
Switzerland typically sees money flow in during economic uncertainty.
The new rate will be introduced on January 22.
A negative rate means depositors pay to lend the bank their money.
SNB said in a statement: “Over the past few days a number of factors have prompted increased demand for safe investments.
“The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.”
The central bank has a cap of one euro equals 1.20 Swiss francs, above which it tries to prevent the franc rising.
Too high a rate has the effect of making Swiss export products more pricey.
Switzerland is also chary about attracting yet more money into its banking heavy small country.
The European Central Bank (ECB) also introduced negative interest rates, albeit for very different reasons.
The ECB wants to keep money out of its banks, not because it wants to reduce the value of the euro but because it wants money flowing round the eurozone countries to boost investment and spending.
Germany’s Commerzbank also recently introduced negative interest rates for bigger corporate clients, but it said that was linked to the ECB’s negative rates policy.