Swiss prices dip in October, shift focus to franc ceiling

Prices fell 0.1 percent year-on-year having risen 0.5 percent a month ago, the Federal Statistics Office said on Monday. Core prices -- stripping out volatile components like food, beverages, tobacco and energy -- fell 0.5 percent.

The franc extended losses against the single currency after the reading, on expectations it would spark policy action from the Swiss Central Bank.

"The October print is not screaming deflation yet, but it's very weak... This could potentially give the (Swiss National Bank) more room to raise the (franc) floor against the euro," Credit Suisse analyst Thomas Herrmann said.

Under mounting pressure from exporters, the SNB capped a soaring Swiss franc at 1.20 francs per euro in September and pledged to defend that level.

Chairman Philipp Hildebrand said at the weekend the SNB was ready to take further steps to weaken the currency if the economic outlook and deflationary trends made it necessary.

So far, the SNB has been able to keep the franc from breaking through this 1.20 limit, but many still view the franc as overvalued and a risk to the domestic economy.

"Risks of Hildebrand following through on his warning to raise EUR/CHF floor look high. Our model has suggested 1.28 to reduce deflationary risk, so 1.25, even 1.30 looks possible," National Australia Bank analyst Gavin Friend said.

The franc, which began trending lower on Hildebrand's comments , was quoted at 1.2339 per euro by 1022 GMT.

SLOWING ECONOMY

Earlier this year the Swiss currency soared to a series of record highs against both the euro and the dollar as investors opted to park their funds in the relatively safe franc, taking shelter from a darkening global economic outlook.

Since the SNB stepped in, it has traded between 1.20-1.25 per euro.

The SNB's next monetary policy assessment is in December, and analysts expect the franc's strength to remain centre stage going into this meeting.

"That was another weak number that will fuel speculation the SNB could raise its minimum exchange rate to 1.25. A 1.25 cap is more likely now," Deutsche Bank analyst Henrik Gullberg said.

"(But) even at that level, the franc is still very strong."

Monday's data also showed joblessness levels edged slightly higher in October, a further sign that the Swiss economy is starting to flounder.

Within the last fortnight, banks Credit Suisse , Julius Baer and Union Bancaire Private have announced job cuts, as have drugmaker Novartis and energy firm Alpiq.

The SNB in September cut its 2011 growth view to 1.5 to 2.0 percent, citing the strong franc. It expects inflation of only 0.4 percent for this year and prices to fall 0.3 percent in 2012.

Copyright Reuters, 2011