FRANKFURT (MNI) – The Swiss National Bank will act decisively to
prevent excessive appreciation of the Swiss franc against the euro in
order to avert any potential deflation dangers, SNB President Philipp
Hildebrand said Tuesday.

While “the worst lies behind us,” remaining downside risks are
nonetheless keeping policy makers alert, Hildebrand said in a speech
prepared for delivery at the University of St Gallen, Switzerland.

Using language very similar to that of the SNB’s latest monetary
policy assessment on March 11, Hildebrand said that the ongoing global
recovery remains fragile, posing risks to the domestic economy. “In the
event of fresh shocks, deflation dangers cannot be entirely excluded,”
he warned.

“One such shock for instance would be an excessive appreciation of
the Swiss franc vis-a-vis the euro. The national bank will not allow
deflation risks to materialize in Switzerland because of such an
appreciation. This is why we will act decisively to counter an excessive
appreciation of the franc,” Hildebrand asserted.

The head of the central bank said that inflation forecasts do not
point to price stability risks in the short term. However, the forecasts
“also show that the current expansive monetary policy cannot be
maintained over the forecast horizon without threatening medium to long
term price stability.”

Inflation expectations have remained solidly anchored throughout
the crisis, Hildebrand added. Those well anchored inflation
expectations, based on central banks’ credibility, allowed the SNB and
other central banks to react with great flexibility to counter the
crisis, he argued.

Now central banks must avoid endandering price stability by keeping
their crisis-induced measures in place for too long, he warned.

Hildebrand cautioned that sustainable recoveries of the global and
Swiss economies are not yet assured. While central bank intervention
appears to have been successful, a conclusive assessment can only be
made once all measures taken to contain the crisis have been reversed.
It thus remains a key challenge for most central banks to find the right
timing for normalizing monetary policy, he said.

Hildebrand also said that the crisis calls for a reassessment of
monetary policy and its role in addressing risks that asset prices can
pose to financial stability. In this respect “the analysis of the
dynamics and mechanisms of credit markets, the monetary aggregates and
the financial system must generally be deepened,” he said.

In addition, central banks must consider whether they should
intervene when strong credit growth and easy credit condition raise
risks in the financial system. “Developments of credit aggregates could
offer important clues in this respect,” he said.

Central banks might do more to contribute to financial stability,
but “ensuring price stability remains the primary aim,” he said.

–Frankfurt bureau; +49-69-720142;

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