February 7, 2012 / 1:22 PM / 8 years ago

Swiss risk deflation if euro crisis worsens: Jordan

GENEVA/ZURICH (Reuters) - The Swiss National Bank fears that an escalation of the euro zone’s debt crisis could prompt deflation, Thomas Jordan said in his first speech since becoming interim chairman of the central bank, stressing his determination to keep a lid on the franc.

The SNB capped the franc at 1.20 per euro on September 6 to prevent Switzerland from tipping into recession and suffering deflation. Safe-haven buyers worried about the euro zone’s debts had pushed the franc up by 20 percent in just a few months.

“If the risk scenario of a further escalation of the debt crisis were to materialize, economic activity in Switzerland would suffer a much more pronounced slowdown than just described,” he said in a speech at a business event. “Such a development would lead to a severe risk of deflation.”

Jordan took over on an interim basis after Chairman Philipp Hildebrand resigned on January 9 following a currency trading scandal and looks set to be confirmed in the post permanently, with the government seen making the appointment this month.

The euro zone is Switzerland’s biggest trading partner and Jordan warned the Swiss economy was likely to post only very weak growth in coming quarters.

Jordan also said the SNB would use unlimited currency interventions to defend the cap, if it became necessary. He made similar comments made in newspaper interviews in recent weeks.

Since Hildebrand stepped down, the franc has gradually strengthened, flirting with the 1.20 level in the last week as the markets test the central bank’s resolve.

To ensure the cap sticks, the SNB had a close watch on markets 24 hours a day, Jordan said.

“This commitment applies at any time, from the moment the market opens in Sydney on Monday to when it closes in New York on Friday,” Jordan said. “The SNB will not tolerate any trading below the minimum rate in the relevant interbank market.”

“We stand ready to take further measures if the economic outlook and the risk of deflation so require,” he said.

The Swiss franc eased a touch against the euro following Jordan’s remarks, but then clawed back those losses. It was trading at 1.2073 at 1201 GMT.

The SNB expects prices to fall and economic growth to slow to just 0.5 percent this year, weighed down by subdued global demand and the unfavorable exchange rate.

While some economists have warned of the risk of inflation due to Switzerland’s ultra-loose monetary policy, Jordan said there was no reason to fear spiraling prices: “There is currently absolutely no risk of inflation in Switzerland.”

Reporting by Tom Miles and Catherine Bosley; editing by Patrick Graham

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