UPDATE 1-SNB seen holding rates low as core inflation negative

Thu Nov 4, 2010 9:16am EDT

 * Swiss core inflation dips 0.1 pct y/y
 * October CPI up 0.2 pct y/y vs forecast of +0.3 pct y/y
 * Analysts see rates on hold well into 2011
 
 (Adds analyst comment, franc, background)
 By Catherine Bosley and Sven Egenter
 ZURICH, Nov 4 (Reuters) - Swiss core inflation turned
negative in October for the first time in at least 16 years as
the strong franc dampened price pressures, indicating that
interest rates could stay at ultra-low levels well into 2011.
 Despite the possibility of overall falling prices, analysts
see no significant risk of a harmful deflationary spiral as the
economy has recovered well from last year's recession and
consumers are keeping spending up as unemployment numbers fall.
 The core inflation index, which excludes foodstuffs, drinks,
tobacco, seasonal products and fuel, dipped 0.1 percent in
October from a year earlier, the Federal Statistics Office said
on Thursday. That was the first fall since at least May 1994,
the earliest set of data available on the Swiss National Bank's
(SNB) website.
 Overall, consumer prices rose 0.2 percent from a year ago,
lagging forecasts for a 0.3 percent rise. ECONCH
  "The central bank has warned that overall inflation could
turn negative early next year, which, if confirmed, wipes the
possibility of a Q1 rate hike off the agenda with Q2/Q3 coming
into focus next," said Nikola Stephan of Informa Global Markets.
 At its most recent policy review in September, the SNB
signalled it was in no hurry to raise its target for the
three-month Swiss franc LIBOR from 0.25 percent currently.
 Markets are pricing in a high probability of a first rate
increase in September 2011. <0#FES:>
 
 DEFLATION UNLIKELY
 The SNB slashed its inflation forecast for 2011 to just 0.3
percent and the forecast for 2012 to a mere 1.2 percent and said
it could not rule out overall prices falling again on a
year-on-year basis at the beginning of next year.
[ID:nLDE68D1IK]
 But economists said the risks of a serious deflationary
spiral -- falling prices, held-back consumer demand and rising
unemployment -- were very low.
"The weakness in core inflation reflects the strong franc and
temporary lagged effects of the recent recession," said
Citigroup analyst Michael Saunders.
 "However, ... real GDP growth is strong, probably above 3
percent year-on-year in 2010 as a whole," he added.
  Despite the brisk economic recovery and ultra-low interest
rates, inflation pressures are set to remain very low.
 "Core inflation in Switzerland should remain extremely
subdued for the remainder of this year and through most of
2011," BNP Paribas economist Eoin O'Callaghan said.
 Switzerland has recorded lower inflation rates over the past
couple of years as the country has eased trade barriers with the
European Union and the entry of German discount chains to
Switzerland forced Swiss retailers to slash prices.
 Politicians have also called on retailers to pass on savings
on imports due to the Swiss franc's strength to consumers. The
country's second-largest retail chain Coop has already run an ad
campaign pledging to cut prices because of the franc's strength.
 The SNB forecasts the Swiss economy will expand by around
2.5 percent this year, but sees a marked slowdown in growth
ahead due to the strong franc and a cooling of the global
economy.
 The franc rose more than 10 percent against the euro in the
first six months of the year and hit an all-time peak of 1.2763
per euro on Sept. 8, though it has lost some ground since as
markets have become less risk averse.
  The SNB had pumped some 200 billion francs into markets via
intervention since March 2009 to fight the deflation risks
brought by a stronger franc.
 But in June this year it dropped its pledge to step in,
saying that deflation risks had largely dissipated and SNB board
member Jean-Pierre Danthine said recently that the current
inflation forecast would not justify further interventions.
 (Editing by Susan Fenton)

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