UPDATE 1-Weak Swiss inflation supports keeping franc cap

Tue Apr 9, 2013 4:08am EDT

By Emma Thomasson

ZURICH, April 9 (Reuters) - Swiss inflation was weaker than expected in March, data showed on Tuesday, underlining the central bank's view that it needs to maintain the lid it has imposed on the strong franc.

Prices fell 0.6 percent from a year ago and rose 0.2 percent from the previous month, the Federal Statistics Office said. Analysts polled by Reuters had forecast prices to fall 0.5 percent year-on-year and rise 0.3 percent month-on-month.

The safe-haven franc, which has strengthened in recent weeks due to the Cyprus banking crisis, slipped slightly after the data, trading down 0.2 percent against the euro at 1.2187 and down 0.2 percent against the dollar at 0.9363.

The Statistics Office said the monthly rise was primarily due to higher prices for the new clothes and shoes range after the winter sales, although it noted heating oil prices fell.

The fall in the year-on-year figure was driven by a 2.4 percent drop in prices for imported goods - a byproduct of the strong franc, while prices for domestic goods rose 0.1 percent.

Seeking to prevent deflation and a recession, the Swiss National Bank capped the franc at 1.20 per euro in 2011 after investors looking for a safe haven from the euro zone crisis had pushed the currency to record highs, pressuring import prices.

"The story in my view is that prices for imported goods are still falling, despite the Swiss National Bank's defense of the 1.20 floor," said David Marmet, economist at Zuercher Kantonalbank.

"This helps the SNB maintain its monetary policy, and I see no signs of it changing. We believe the SNB will maintain the cap well into 2014."

Core inflation, which strips out more volatile components like food and beverages, seasonal products, energy and fuel, fell 0.6 percent in March.

At its quarterly policy meeting in March, the SNB reiterated its commitment to the minimum exchange rate as it trimmed its inflation forecasts, predicting prices will fall 0.2 percent in 2013 and rise just 0.2 percent in 2014 and 0.7 percent in 2015.

Recent economic data has suggested a recovery in the Swiss economy is stalling, with manufacturing activity contracting in March for the first time since December as companies were unnerved by instability in the euro zone.

"There is no reason for inflationary pressure in coming months," said Credit Suisse economist Maxime Botteron.

"There is also no great risk of a deflationary spiral in Switzerland as the minimum exchange rate means that import prices should not fall too much."

Swiss unemployment data on Tuesday showed the seasonally adjusted rate unchanged in March at 3.1 percent, while retail sales fell 0.2 percent in February when adjusted for seasonal effects.