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Swiss Deflation Remains Concerning

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The Swiss National Bank (SNB) has published it’s first Quarterly Bulletin of 2013.

Key to this report is that the SNB has recommitted to maintaining the cap on the Swiss Francs appreciation against the Euro. This artificial exchange rate barrier was established in 2011 during the peak of the European banking crises when European money moved en masse from shaky looking European banks to the relative safety of the Swiss banking system. EURCHF traded at parity, a level very much un-welcomed by the Swiss authorities.

The SNB is blaming the rising Franc for delaying a pickup in the countries inflation rate. Last recorded at -0.1% Swiss prices are stubbornly refusing to rise at a pace that would make the SNB comfortable. On the plus side deflation has all but dissipated and Swiss inflation has come back from negative 1.2% in 2012 to record one positive month last December before retreating back to minus territory. The SNB are now projecting 0% inflation in 2014 rising to 0.4% in 2015 and 1% in 2016, these projections are 20bps lower than predicted in last Decembers SNB Bulletin.

The unique robustness of the Swiss economy is providing some resilience against the grip of deflation. Unemployment is at a very enviable 3.4% while GDP growth is currently at 1.7%, the latter statistic however has been gradually slipping back from a peak of 2.7% last year.

Swiss interest rates have been at 0% for quite some time, this obviously reduces the SNB’s scope to stimulate economic activity. More concerning however for the Swiss economy is the gradual erosion of it’s banking sector. New regulations are curtailing banking activity and in some cases have lead to the winding down of historic Swiss financial institutions. A recent spate of US legislation has led to a dramatic scaling back of Swiss banking activities in the US, Germany is also turning the screws on this legendarily private banking sector. In response Swiss banks are stepping up their Asian activities but overall they are feeling the pinch of the global tightening of financial regulation.

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