You may have stumbled across this Bloomberg story on Wednesday:
Swiss 1970s Inflation Specter Seen in SNB’s Unlimited Sales
Swiss central bank President Philipp Hildebrand’s pledge to protect the economy with unlimited currency purchases may come at a higher cost than billions of francs: faster inflation. Hildebrand’s decision risks flooding the financial system with cash and undermining the Swiss National Bank’s job of delivering price stability, said economists at Credit Suisse Group AG and Barclays Capital.
While central banks around the globe are seeking to ward off a recession through additional stimulus or rate cuts, the franc’s ascent forced Swiss policy makers into measures that sparked a decade of surging inflation when last introduced in the 1970s.
“You can’t have your cake and eat it,” said Claude Maurer, an economist at Credit Suisse in Zurich. “You can either pursue a ceiling on the exchange rate or you can fight price pressures. The SNB apparently sees medium-term inflation threats as the lesser of two evils.”
Well, Thursday’s statement from the SNB seems to be aimed almost directly at these economists at Credit Suisse and Barclays Capital who dare spread inflation fears!
As the SNB sharply expressed:
The SNB’s conditional inflation forecast has shifted substantially downwards as a result of the massive appreciation in the Swiss franc and the deterioration in the outlook for the global economy. For 2011, the forecast shows an inflation rate of 0.4%, for 2012 a rate of –0.3% and for 2013 a rate of 0.5%. This forecast is based on the assumption of a three-month Libor of 0.0% and a further weakening in the Swiss franc. In the foreseeable future, there is no risk of inflation in Switzerland. There are, however, downside risks for price stability should the Swiss franc not weaken further.
In other words, shut up. There is no inflation risk.
And given that, we’re sticking to our guns, no matter what erm collateral damage it brings about:
The Swiss National Bank will enforce the minimum exchange rate of CHF 1.20 per euro set on 6 September with the utmost determination. It is prepared to buy foreign currency in unlimited quantities. It continues to aim for a three-month Libor at zero and will maintain total sight deposits at the SNB at significantly above CHF 200 billion.
With these measures, the SNB is taking a stand against the acute threat to the Swiss economy and the risk of deflationary development that spring from massive overvaluation of the Swiss franc. Even at a rate of CHF 1.20, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflation risks so require, the SNB will take further measures.
There you have it.
Caging unilateral risk – FT Alphaville