Ending the Swiss peg: What it really means

A man holds a 100 Swiss franc bank note in front of an ATM in Bern.
Denis Balibouse | Reuters
A man holds a 100 Swiss franc bank note in front of an ATM in Bern.

The Swiss National Bank's move to break the franc away from its set value against the euro stunned financial markets and has substantial real-world effects.

What the bank essentially did was rescind a 3-year-old agreement it had to keep its money valued at 1.20 per euro, which had been done to promote exchange rate stability even though Switzerland does not use the common currency.

While the move caused tumult in the financial markets, it will be a boon to Swiss consumers. An item priced at 50 euros in Brussels would suddenly cost 51 francs in Davos on Jan. 15 after costing 60 francs on Jan. 14.

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From a more strategic viewpoint, the Swiss bank defended its currency against a likely European Central Bank move that will see a massive bond-buying program likely to devalue the euro further. Nomura Securities economists speculated that the Swiss move was a signal that the ECB's quantitative easing program would exceed market expectations.

In the face of that, the SNB decided it no longer could stand by and let its own currency decline any further.

For consumers in Switzerland, it meant cheaper goods, but for an economy that relies on exports, it made life more difficult for companies.