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UPDATE 1-SNB has right tools to absorb liquidity-Danthine

Published 03/24/2011, 03:07 PM
Updated 03/24/2011, 03:08 PM

* SNB's Danthine says primary goal is price stability * Cost of interventions not found on balance sheet-Danthine (Adds background and details)

ZURICH, March 24 (Reuters) - The Swiss National Bank has the right tools to maintain stable prices and absorb the billions of francs it pumped into markets via its interventions in 2009 and 2010, board member Jean-Pierre Danthine said on Thursday.

The SNB began selling francs for euros in March 2009 to stave off the risk of deflation exacerbated by a strong franc. But it dropped them last June, saying the risks had dissipated. [ID:nLDE65E1W2]

Since then, the SNB has been using auctions of its own debt -- so-called SNB bills -- and reverse repos to withdraw the liquidity, and Danthine said these were an "efficient toolset" for the future.

"They place the SNB in a sound position to steer the LIBOR rate at the level to maintain price stability," Danthine said in the text of a speech for a money market event in Zurich.

Domestic conditions were of prime importance in determining monetary policy although the SNB had an eye on the rest of the world as well/

"In Switzerland, we have to consider the Swiss situation," Danthine said.

The Swiss National Bank has come under heavy fire for tens of billions of francs in losses it ran up last year from its foreign-exchange interventions, and Chairman Philipp Hildebrand has faced calls to resign. [ID:nLDE7220BQ]

But Danthine said the SNB had not been defeated by markets in its interventions.

The SNB's policy should not be judged by the red ink on its balance sheet, but by how inflation developed over time, Danthine said.

"Our foreign-exchange interventions will be revealed to have been costly if they result in serious inflationary pressure two to three years from now," he said.

At its policy review on March 17, the SNB dropped any reference to deflation risks in its statement, adding that interest rates could not stay at rock bottom forever as inflation is set to breach its price stability threshold of 2 percent by mid-2013. [ID:nLDE72F1D8] (Editing by Jan Paschal)

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