Switzerland's central bank announced Thursday it was introducing negative interest rates to stop the franc getting any stronger, after the Russian ruble crisis sent investors pouring their investments into the safe haven currency.
The Swiss National Bank will impose a rate of -0.25 percent on certain bank deposits on January 22, with the aim of pushing the target range of Switzerland's benchmark interest rate into negative territory.
"The Swiss franc has been experiencing renewed upward pressure vis-à-vis the euro in the last few days," said Thomas Jordan, chairman of the SNB governing board.
"Rapidly mounting uncertainty on the financial markets has substantially increased demand for safe investments. The worsening of the crisis in Russia was a major contributory factor in this development."
The ruble crashed to historic lows this week of 80 to the dollar and 100 to the euro, as the energy-export dependent economy was hit by a rout in oil prices.
It has prompted Russians to rush to exchange their savings and make a run on stores to dump the devaluing national currency ahead of expected price hikes.
With the safe haven Swiss currency in demand, the SNB was forced to take action to protect the country's vital export sector.
The negative interest rate will be imposed on so-called sight deposits, funds which can be accessed immediately, but only apply to balances above a certain threshold.
The SNB said the aim of the rate change was to take the three-month Libor rate, which Switzerland uses to determine interest rates on mortgages and savings accounts, into negative territory.
The target range for Libor -- the name for the franc's three-month London interbank offered rate -- is now between -0.75 percent and 0.25 percent, compared to its previous level of between 0.0 and 0.25 percent.
"This measure will lead to a further decline in the interest earned on Swiss-franc investments, making them less attractive, and thereby easing the upward pressure on the Swiss franc," Jordan said.
He reiterated the central bank's "utmost determination" to keep to an exchange-rate floor of 1.20 francs to the euro -- a move that effectively imposes a limit on how strong the Swiss currency can get.
"Without the minimum exchange rate, price stability in Switzerland would be seriously compromised," Jordan said.
He repeated that the SNB was "prepared to purchase foreign currency in unlimited quantities and to take further measures, if required".
- 'Battle of measures' with ECB -
Analysts had been expecting negative rates even before the Russian crisis, because of the increasing risks of deflation in Switzerland and in anticipation of further stimulus measures by the European Central Bank.
"What happens from here will depend in part on how the Russian crisis develops," said Jonathan Loynes, chief European economist with Capital Economics.
But he added: "We have been warning for some time that the commencement of quantitative easing by the ECB would put further upward pressure on the franc and hence force the SNB into more action."
With the ECB governing council meeting next on January 22, he said it was likely the SNB would soon have to follow up the rate cut with further currency intervention.
Laurent Bakhtiari, market analyst at IG Bank, said the rate cut was the start of a "long-awaited battle of measures" between the SNB and ECB.
"The SNB played the first move very well. From now on, the SNB will constantly have to be one step ahead of the ECB if they want to defend the 1.20 minimum rate," he said.
Since setting the minimum exchange rate in September 2011, the bank has intervened whenever necessary to protect it by buying up euros.
In 2011, it spent 11 billion francs doing so, and another 188 billion francs between May and September 2012, at the height of the eurozone crisis.