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Fall in Swiss retail sales adds to deflation fears

[ZURICH] Swiss retail sales fell sharply in February, data showed on Friday, raising concerns it could be an early sign of deflation as the franc's rise and falling prices lead consumers to hold onto their money and wait for better deals or spend abroad.

The Swiss National Bank's (SNB) decision to abandon its cap on the value of the franc at 1.20 per euro on Jan. 15 sent the currency soaring and removed a shield against deflation that had protected the Swiss economy since September 2011.

Any signs deflation is setting in could increase the likelihood of SNB action, either to weaken the franc through currency interventions or by cutting rates further into negative territory.

Retail sales fell 4.4 per cent in February in nominal terms year-on-year, and still fell 2.7 per cent even when adjusted for inflation, data from the Swiss Federal Statistics Office showed.

"The deflation in the Swiss market is expected to deepen with slowing economic activity," said Ipek Ozkardeskaya, a market analyst at London Capital Group.

"The latest data endorses our anxiety that Switzerland may be at the edge of a perilous deflation cycle."

The SNB has repeatedly said it does not expect Switzerland to tip into a deflationary spiral, and that it is ready to intervene in foreign exchange markets if necessary to influence monetary conditions.

Even so, it cut its inflation forecast for 2015 at its March monetary policy meeting, predicting prices to fall 1.1 per cent, which would be the biggest decline since 1950.

The upward pressure on the franc, which was slightly stronger on Friday at 1.02835 per euro by 1145 GMT, is expected to continue as a result of the European Central Bank's 1 trillion euro government bond buying programme, due to run until September 2016.

"The next major level at which we can expect a SNB reaction is at parity," said Andreas Ruhlmann, a market analyst at IG Bank, adding this would probably involve a further rate cut.

Others have been more upbeat about the economy's prospects. Switzerland's government said this week it does not expect a serious economic crisis.

"It would be incorrect to forecast too much in this single data point, especially after recent data looked encouraging," said Peter Rosenstreich at Swissquote, though he added the stronger franc could easily increase deflationary pressure. "The effect on inflation will be one of the key concerns for the SNB," he added.