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Swiss consumer price index falls 0.1%

Switzerland is facing a growing threat from falling prices, official data showed Monday, just two months after the central bank announced a policy to drive down the value of the currency and maintain price stability.

The Swiss consumer price index fell 0.1 percent in October from September and was down 0.1 percent from a year earlier, the Federal Statistics Office said in Neuchatel, Switzerland. That followed a report last month that showed producer and import prices fell 0.1 percent in September from August and 2 percent from a year earlier.

“This reinforces concerns that deflation will return to Switzerland,” said Lee Hardman, a currency economist in London with Bank of Tokyo-Mitsubishi UFJ.

Deflation punishes borrowers by raising real interest rates, and makes businesses and consumers less willing to buy because they suspect that prices will fall in the future.

The Swiss National Bank, the nation’s central bank, has watched with alarm as investors fleeing the crisis in the euro zone have bought Swiss assets, driving the franc up against the euro and other currencies. That hurts Swiss exports and businesses operating overseas. But while cheap imports to Switzerland are contributing to deflation, the influx of foreign money seeking a Swiss haven is causing some prices to rise — real estate, for example, which cannot be imported.

Bank officials have described the franc as being greatly overvalued.

An increase in the value of a country’s currency against those of its trading partners contributes to deflation by reducing the cost of imports. With its safe currency and an open economy in the middle of a Europe in turmoil, Switzerland would appear to be particularly vulnerable.

The central bank acted on Sept. 6 to set a minimum level of 1.20 francs against the euro and said it would spend an unlimited amount to defend it. That policy seems to have paid off. The franc has returned to near its levels at the start of 2011.

On Monday evening, the dollar was at 0.9021 franc, up about 1.5 percent from Friday, while the euro was at 1.2391 francs, up about 0.5 percent. Mr. Hardman, the economist, noted that even at 1.20 francs to the euro, the Swiss currency was well above the 1.30-1.40 francs that many analysts consider fair value.

If the authorities, fearing deflation, decided that the current policy was not aggressive enough, they could raise the floor toward the fair-value range, he said. “But the floor has been relatively successful, as we haven’t seen much in terms of attacks in the market,” he said.

A higher floor might invite such attacks. “And the higher they set the floor, the greater the likelihood that they’re exposing themselves to losses in the future,” he said

The central bank had a 32.8 billion franc foreign-exchange loss last year trying to rein in the franc.

In an interview published Sunday in NZZ am Sonntag, a Swiss newspaper, the central bank’s chairman, Philipp Hildebrand, said the authorities were “ready to take further measures” if the franc did not eventually weaken further.

Source: nytimes.com

Publication date: 11/11/2011


 


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