Hildebrand Says SNB Can Intervene in Franc Market at Fixed Rate

By Joshua Gallu and Simone Meier

Jan. 22 (Bloomberg) -- Swiss National Bank Vice-President Philipp Hildebrand said policy makers are prepared to intervene in currency markets at fixed exchange rates if necessary to prevent a “renewed appreciation” of the franc.

“There’s a good chance they’ll follow through with these measures,” said Reto Huenerwadel, senior economist at UBS AG in Zurich. “With concerns about deflation and rates already near zero, they have limited options.”

The franc has risen around 6 percent against the euro since October as the global financial crisis forced the Swiss central bank to cut its benchmark rate by 225 basis points, taking it to 0.5 percent. That’s smothering inflation and hurting exports, which make up more than half of Swiss gross domestic product.

“With short-term rates of practically zero, the SNB can’t prevent a further appreciation in the Swiss franc through a rate cut,” Hildebrand said in a speech in St. Gallen, Switzerland late yesterday. “The SNB is able to sell unlimited Swiss francs versus another currency. In an extreme case, it can commit itself at the same time to buying unlimited currencies at a fixed- exchange rate.”

The franc dropped after the remarks, to 1.5009 per euro from 1.4793 the previous day. It reached a record high of 1.4315 versus the euro on Oct. 27. Against the dollar, the franc fell to 1.1616, the weakest since Dec. 15.

‘Strong Franc’

“The strong franc is certainly a burden for exports given waning global demand,” said Fabian Heller, an economist at Credit Suisse Group in Zurich. “Words are not enough to weaken the franc. But the longer the situation lasts, the higher the chance of the SNB intervening” in currency markets.

SNB comments on the strength of the franc will probably discourage bets that it will keep rising, Ashley Davies, a currency strategist at UBS, the world’s second-largest foreign- exchange trader, said in a Jan. 19 note. The franc will trade between 1.47 and 1.54 versus the euro throughout 2009, Davies said.

“A central bank is always able to increase the absolute amount of its own currency in circulation,” said Hildebrand. “Further options” for policy makers include purchasing government bonds on the secondary markets, he said, conceding that using unconventional tools “isn’t without risks.”

“The SNB will assess very carefully whether and to what extent it will use them,” said Hildebrand.

Deflation

A sustained period of falling prices would make fighting the economic crisis harder, Hildebrand said. Swiss inflation, which slowed to 0.7 last month, may turn negative as soon this summer, the central bank estimates.

“Deflation is just as undesirable as inflation,” he said. “This doesn’t mean that we concretely are counting on deflation from today’s point of view, rather the point is that the uncertainty is enormously high.”

Switzerland’s economy will probably shrink between 0.5 percent and 1 percent this year, according to the SNB. As soon as the economy regains its footing, the SNB should raise rates to ensure price stability, Hildebrand said.

“The central bank can and will continue to provide liquidity, as much and for as long as needed,” Hildebrand said. “The SNB will continue to act in a decisive way in order to counter the effects of the economic contraction.”

To contact the reporters on this story: Joshua Gallu in Zurich at jgallu@bloomberg.net; Simone Meier in Frankfurt at smeier@bloomberg.net.