UPDATE 2-SNB says FX intervention a success, sticking to policy

* SNB chairman repeats cbank’s intervention threat

* Says will not allow deflation risks from franc rise

* Says SNB does not react mechanically to inflation f’casts

* IMF says SNB should not hike rates too quickly

(Adds details, IMF forecast, background)

By Sven Egenter

ST. GALLEN, Switzerland, March 23 (Reuters) - The Swiss National Bank will keep fighting an excessive rise of the franc against the euro decisively to avoid deflation risks resurfacing, its chairman said, adding the economy’s robust performance proved the policy’s success.

Markets, however, were little fazed by Chairman Philipp Hildebrand’s intervention rhetoric on Tuesday, with the Swiss franc trading largely unchanged on the day but still within sight of record levels hit at the height of the global financial crisis. [ID:nLDE62M09H]

In a discussion following a speech at the University of St. Gallen, Switzerland, students pressed Hildebrand on the success of central bank interventions and the definition of “excessive”.

“If you want to assess the success, then you should not only look at a certain exchange rate, but look at the success of the Swiss economy,” Hildebrand said.

He repeated the central bank’s pledge to fight an excessive rise of the Swiss franc.

“We have a broad range of means to prevent an excessive appreciation and we are going to do this to ensure that the recovery can continue,” he said.

“The instruments are clear: We buy foreign currencies. We can do that in very large quantities,” he said. [ID:nZAT010782]

“An excessive appreciation is if deflation risks were to materialise,” he said. “We will not allow this to happen.”


The Swiss economy shrank by 1.5 percent last year, but emerged much less bruised from the global financial crisis than many of its neighbours.

The central bank sees the economy growing around 1.5 percent in 2010, a view shared by the International Monetary Fund in its latest forecast for Switzerland, published on Tuesday.

“Any exit from expansionary policies should be gradual,” the IMF said in a statement on the Swiss finance ministry’s website. “Interest rates should not be raised too early or without regard to a strengthening in the currency.” [ID:nWEB6792]

Interest rate futures point to a high probability that the first small rise in the SNB’s target for the three-month Swiss franc LIBOR interest rate -- currently at 0.25 percent -- will be in September. <0#FES:>


Hildebrand’s wording on the currency was in line with that used by the central bank at its March 11 policy review, when the SNB was seen to inch closer to raising interest rates with a more optimistic set of forecasts on growth. [ID:nLDE6291VQ]

Markets have been mulling over the SNB’s intervention levels after the central bank has allowed the franc to rise some 2 percent since the March meeting despite sticking to its pledge to counter decisively an excessive rise against the euro.

The franc, seen as a safe haven asset, is now trading at around 1.4330, within sight of its record high of 1.4296 hit in October 2008 in the wake of the collapse of Lehman Brothers.

Hildebrand also repeated the central bank’s assessment that price stability was not in danger in the short term but the current expansionary monetary policy could not be maintained over the SNB’s three-year forecast horizon.

The central bank forecasts that inflation will rise above its 2 percent price stability threshold in 2012.

Hildebrand pointed out that the SNB’s inflation forecasts were fraught with uncertainties.

“The SNB board does not react mechanically on the inflation forecast,” he said.

“How fast the national bank reacts, if mid- to long-term price stability is potentially in danger -- as our current forecast is showing -- depends on various factors. The uncertainty surrounding the economic developments and the situation on the financial markets are such factors.” (Reporting by Sven Egenter; Editing by Susan Fenton)