Financial Watch

The Swiss central bank can buy very large quantities of foreign currency to influence the level of the Swiss franc and keep deflation in check, Swiss National Bank President Philipp Hildebrand said Tuesday.

“We won't allow deflation risks to reemerge, our position is crystal clear,” Hildebrand said before a student audience at the University of St. Gallen. A surge in the Swiss franc could give rise to such a danger, he added.

“It looks like the SNB is raising the level of its rhetoric on curbing any franc gains,” said Janwillem Acket, chief economist at Bank Julius Baer (BAER.VX). “The threat of deflation is a bit exaggerated, and they're trying to impress the markets,” he added.

Hildebrand didn't give further indications on the SNB's future interest-rate moves or foreign-exchange strategy.

However, he said “the means at our disposal are clear: we buy foreign currency, and the scope of such measures can be huge.”

The franc has strengthened from around 1.48 against the euro at the end of 2009, to 1.4339 by 1000 GMT Tuesday, and it weakened only briefly after Hildebrand's comments.

Commenting on past SNB interventions in foreign currency markets to prevent excessive franc gains, particularly against the euro, Hildebrand said the bank's policy has been relatively successful.

“You have to look at the development of Switzerland's economy. It did relatively well last year, contracting by only 1.5%, and that is a good performance compared with many other countries. I'd say we have contributed a great deal to this by preventing a harsher recession,” he said.

London-based National Australia Bank currency strategist Gavin Friend agreed, saying the SNB doesn't want to jeopardize the good work of the past year.

“They don't want to impart the impression they are doing nothing, and will do whatever is good for the Swiss economy,” Friend said.

Hildebrand said the world economic recovery continues, although it remains fragile.

Referring to the SNB's monetary-policy assessment March 11, Hildebrand said the inflation projections through the fourth quarter of 2012 “show price stability in the short term isn't in danger.”

“The projection, however, also shows the current expansive monetary policy stance can't be pursued over the entire projection horizon without endangering medium- and long-term price stability,” he said.

The SNB kept its three-month Libor target range unchanged at its policy review earlier this month.

The SNB has achieved price stability in the medium- to long-term, and anchored inflationary expectations, he said. In addition it has withstood the recent global financial crisis, but can't rest on its laurels.

Central banks need to ensure the financial system has adequate liquidity and to ease the monetary conditions in general, Hildebrand said.

“However, we can't assume this will always be the case, and there may be a situation where financial stability may make restrictive monetary policy necessary,” he said.