UPDATE 1-Swiss forex reserves dip for first time in 8 months

Wed Nov 7, 2012 4:33am EST

(Adds inflation data, background, comment)

By Catherine Bosley

ZURICH Nov 7 (Reuters) - Switzerland's foreign exchange reserves fell for the first time in eight months in October and price pressures were low, giving its central bank more ammunition to extend its cap on the franc.

The Swiss National Bank held 424.38 billion Swiss francs ($449.70 billion) compared with 429.48 billion in September, according to data published on Thursday.

The reserves declined for the first time since February, trimming the central bank's currency holdings to the equivalent of 72 percent of gross domestic product.

The SNB set a 1.20 per euro cap on a strengthening franc in September 2011 to forestall deflation and a recession.

Its reserves ballooned as a result as an escalating euro zone crisis forced it to intervene heavily. But an easing of the crisis since this September has seen the franc weaken towards 1.21 per euro.

Thursday's preliminary reserves data was complied under International Monetary Fund standards.

Since the SNB suffered a record loss on its forex holdings in 2010 that resulted in calls for then-chairman Philipp Hildebrand to resign, investors have scrutinised the reserves data for clues about SNB policy on how long the cap might last.

"Humming along is probably the way forward," said UBS economist Reto Huenerwadel, who thinks the cap on the franc is here to stay, regardless of the size of the balance sheet. "The next quarter will be a lot like the last, I believe.

"Boring, but that's exactly what the Swiss National Bank wants to be."

Another factor in the equation is inflation.

Low price pressures give the SNB more leeway for big interventions and support its justification for the cap.

Last month, consumer prices fell 0.2 percent from a year ago, data published on Wednesday showed, a bigger drop than analysts in a Reuters poll had expected.

"Growth is suffering due to the weak economy in the euro zone, which means a marked rise in the rate of inflation won't happen for now," said VP Bank investment research head Bernd Hartmann.

According to its mandate, the SNB must keep inflation positive but below 2 percent.

The Swiss economy long seemed immune to the woes afflicting the neighbouring euro zone, but it shrank in the second quarter. The government expects GDP growth of 1 percent this year, with a slight pick-up from that level in 2013.

($1 = 0.9437 Swiss francs) (Additional reporting by Caroline Copley; Editing by John Stonestreet)

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