REFILE-Swiss prices fall in Dec, reinforcing SNB's case for currency cap

Fri Jan 11, 2013 4:18am EST

* Prices dip 0.2 pct m/m, confound forecast for no change

* Inflation expected to turn positive in coming months

* SNB capped franc to fight deflation and recession

ZURICH, Jan 11 (Reuters) - Swiss consumer prices dropped more than expected in December as costs for medicine, package trips, oil, and clothing fell, reinforcing the Swiss National Bank's case for maintaining a cap on the Swiss franc against the euro.

Prices fell 0.4 percent from a year ago, the same drop as recorded in November, and were down 0.2 percent from the previous month. Analysts had forecast flat prices on the month.

"Even though the distorting effects from the rise in the Swiss franc are fading out, we're still waiting for positive inflation rates. We are, however, expecting inflation rates to turn positive in coming months," VP Bank economist Bernd Hartmann said.

Seeking to prevent deflation and a recession, the SNB capped the franc at 1.20 per euro in September 2011 after investors seeking a safe haven from the euro zone crisis had pushed the Swiss currency from one record high to another.

The central bank lowered its near-term outlook for inflation at its quarterly policy review last month, predicting prices would fall 0.1 percent in 2013 and rise just 0.4 percent in 2014, far below the SNB's 2 percent threshold for price stability.

"Giving up the exchange rate floor is not on the agenda (of the SNB) so there is no inflation pressure from the exchange rates," VP Bank's Hartmann said.

"On the whole, the economy is only slowly picking up speed, meaning we will not see high inflation rates in 2013." (Reporting by Katharina Bart and Silke Koltrowitz; Editing by Susan Fenton)

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