Jan. 21 (Bloomberg) -- Swiss National Bank Vice-President Philipp Hildebrand said policy makers are prepared to intervene in currency markets at fixed exchange rates if necessary to prevent a “renewed appreciation” of the franc.

“With short-term rates of practically zero, the SNB can’t prevent a further appreciation in the Swiss franc through a rate cut,” Hildebrand said in a speech in St. Gallen, Switzerland today. “The SNB is able to sell unlimited Swiss francs versus another currency. In an extreme case, it can commit itself at the same time to buying unlimited currencies at a fixed-exchange rate.”

The franc has risen around 7 percent against the euro since October as the global financial crisis forced the Swiss central bank to cut its benchmark rate by 225 basis points, taking it to 0.5 percent. That’s smothering inflation and hurting exports, which make up more than half of Swiss gross domestic product.

“The strong franc is certainly a burden for exports given waning global demand,” said Fabian Heller, an economist at Credit Suisse Group in Zurich. “Words are not enough to weaken the franc. But the longer the situation lasts, the higher the chance of the SNB intervening” in currency markets.

The franc dropped after the remarks, trading at 1.4846 per euro at 6:52 p.m. in Zurich, from 1.4793 yesterday. It reached a record high of 1.4315 versus the euro on Oct. 27.Against the dollar, it weakened to 1.1543, from 1.1462 yesterday.

‘Further Options’

SNB comments on the strength of the franc will probably discourage bets the currency will keep rising, Ashley Davies, a currency strategist at UBS AG, the world’s second-largest foreign-exchange trader, said in a note on Jan. 19. The franc will trade between 1.47 and 1.54 versus the euro throughout 2009, Davies said.

“A central bank is always able to increase the absolute amount of its own currency in circulation,” said Hildebrand. “Further options” for policy makers include purchasing government bonds on the secondary markets, he said, conceding that using unconventional tools “isn’t without risks.”

“The SNB will assess very carefully whether and to what extent it will use them,” said Hildebrand.

A sustained period of falling prices would make fighting the economic crisis harder, Hildebrand said. Swiss inflation, which slowed to 0.7 last month, may turn negative as soon this summer, the central bank estimates.

“Deflation is just as undesirable as inflation,” he said. “In today’s environment, one could ask whether it wouldn’t be better to aim for a higher inflation rate in order to avoid deflation at any cost.”

The economy will probably shrink between 0.5 percent and 1 percent this year, according to the SNB. As soon as the economy regains its footing, the SNB should raise rates to ensure price stability, Hildebrand said.

“The central bank can and will continue to provide liquidity, as much and for as long as needed,” Hildebrand said. “The SNB will continue to act in a decisive way in order to counter the effects of the economic contraction.”

To contact the reporters on this story: Joshua Gallu in Zurich at jgallu@bloomberg.net; Simone Meier in Frankfurt at smeier@bloomberg.net.

Last Updated: January 21, 2009 13:00 EST