May 7, 2012 / 10:33 AM / in 6 years

Weak Swiss prices underline rationale for currency cap

ZURICH (Reuters) - Swiss consumer prices barely rose in April, leaving them falling on an annual basis and underlining the rationale behind the Swiss National Bank’s currency cap to shield the economy from deflation.

Huge investment flows into Switzerland, seen as a safe port of call during the financial and euro zone crises, have sent the franc soaring, pushing down domestic prices and prompting the central bank to step in and try to hold the line.

Data showed on Monday that Swiss consumer prices rose just 0.1 percent last month from March, held up chiefly by higher prices for petrol, summer clothing, package holiday tours and air transport.

But on an annual basis, prices fell 1.0 percent, the Federal Statistics Office said.

It was the seventh consecutive decline in the year-on-year index, which has been falling since October 2011.

Furthermore, core inflation - which strips out more volatile components like food and beverages, seasonal products, energy and fuel - fell 1.2 percent from a year earlier, the data showed.

“Inflation should remain in negative territory for some months,” said Credit Suisse economist Maxime Botteron. “For the SNB (Swiss National Bank) this probably means no change - given inflation remains for now more or less in line with their forecast.”

To contain the risk of the red-hot franc tipping the economy into recession and deflation, the SNB capped the currency last September at 1.20 per euro.

HARD TO CHANGE

Financial markets are watching keenly for any sign the bank could shift the cap to weaken the franc further after some politicians, trade unions and exporters advocated shifting the limit towards 1.30 or even 1.40.

Many analysts, however, contend that further measures do not seem imminent as unemployment remains low, leading indicators such as the sentiment gauge KOF CHKOFL=ECI signal rising momentum and the economy seems generally more robust than its neighbors.

The bank’s new chairman, Thomas Jordan, said two weeks ago that policymakers would take further steps if deflation risks resurface.

But he insisted that the cap is an emergency step and cannot simply be adjusted at will.

“A minimum exchange rate is an extreme measure only to be introduced in a situation of massive overvaluation with the aim of averting the worst developments,” Jordan told the SNB’s annual shareholders’ meeting.

He said the fact that the franc had jumped to 1.20 per euro from 1.12 within minutes of the SNB announcing the cap on September 6 might have created the impression that the step was a normal measure that was straightforward to put in place.

“It is neither a panacea capable of solving all the problems facing the Swiss economy, nor can it simply be implemented for any desired level, free of any risk,” he said.

Although the SNB forecasts prices falling this year, the economy has so far escaped contraction and the central bank forecasts growth of around 1 percent for 2012.

The jobless rate clocked in at 3.1 percent in April, data on Monday also showed.

BACKGROUND

For a story on Swiss economy click on LEN-RTRS-MCE-CH

Editing by Jeremy Gaunt.

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