The Swiss National Bank dangled the threat of capital controls to hold down the value of the franc if the euro zone crisis escalates, days before a Greek election that could drive another flood of money into the safe-haven currency.
The central bank said it was determined to defend a cap of 1.20 per euro on the franc it imposed on Sept 6 and was ready to buy foreign currency in "unlimited quantities".
"Even at the current rate, the Swiss franc is still high. Another appreciation would have a serious impact on both prices and the economy in Switzerland," SNB chairman Thomas Jordan told a news conference on Thursday.
"The SNB will not tolerate this. If necessary it stands ready to take further measures at any time."
Asked repeatedly about the possibility of capital controls, Jordan declined to say what sort of additional steps the SNB was looking at.
"Concerning capital controls, there are various experiences and various ways to implement them and there are also countries that have also had positive experiences with these measures in the recent past," he told one questioner.
"We are continuously looking at all possible other measures. It is to be understood in the sense of an emergency plan, if there is a corresponding escalation of the crisis.".
However, the lack of any concrete additional measures in the SNB's announcement following its quarterly monetary policy meeting pushed the franc up 0.1% against the euro to 1.2003, testing the SNB's limit.
"We expect further pressure on the EURCHF 'floor' in the coming days, especially considering the Greek elections," said Peter Rosenstreich, chief forex analyst at Swissquote, adding he saw the threat of capital controls as sabre-rattling.
"Our gut reaction is this verbiage is a tool to add uncertainty to the policy decisions - a cheaper route than direct intervention - geared at keeping speculators sidelined," he said. "The SNB is trying to downplay franc attractiveness and buy more time."
Last opinion polls before a blackout ahead of Sunday's Greek election showed the leftist SYRIZA party which wants to scrap Greece's 130 billion euro bailout deal running neck-and-neck with the conservative New Democracy party.
Jordan has said recently Switzerland could consider capital controls to deter a flight to the franc if Greece leaves the euro, but most economists believe they would have little effect and could seriously hurt the big Swiss banking industry.
Last month, as markets grew increasingly anxious about Athens' future in the currency bloc, the SNB had to expand its forex reserves by nearly a third to make the cap stick.
Citing the risk of deflation and a recession, the SNB set the cap last year as investors fleeing the euro zone pushed the franc up some 20% in just a few months, threatening ruin for Swiss exporters and the country's tourism industry.
"Risks exceptionally high"
The policy has helped the economy to stabilise, prompting the SNB to raise its growth forecast for the year to 1.5%, from close to 1%.
But the SNB said that was just because of an unexpectedly strong performance through the winter and it still expects a significant slowdown for the rest of the year.
"The risks for the Swiss economic situation remain exceptionally high," Jordan said.
"The uncertainty about future developments in the euro area has again risen. If global activity proves disappointing or the turmoil on the financial markets increases, downside risks will again emerge for the economy and price stability."
The SNB trimmed its inflation forecast for 2012 to minus 0.5% from minus 0.6%, but kept its forecasts for 2013 and 2014 steady at 0.3% and 0.6% respectively.
Jordan rejected the idea of using the huge foreign currency reserves the SNB has built up by intervening to weaken the franc to create a sovereign wealth fund - an idea some Swiss politicians have proposed to boost the bank's returns.
"The creation of such a fund would not help to enforce the minimum exchange rate," Jordan said. "It does little to assist Switzerland or Swiss monetary policy."
He said such funds in Norway and other oil states could not serve as a model as they invested income from commodity exports, while a Swiss fund would be financed through printing money.
Jordan said the SNB was working to diversify its holdings, with 10% of investments now in shares, adding that the bank had invested in the Korean won since the start of 2012, with other investment opportunities continually being evaluated.
Broad political support for the franc cap and calls from e xporters to weaken the currency towards 1.30 or 1.40 per euro initially helped the SNB to defend the limit without spending much.
But the escalation of the euro zone crisis has encouraged speculators to test the SNB's resolve of late just as influential voices have started to question the policy.
In its annual financial stability report, the SNB also urged Switzerland's two big banks, UBS and Credit Suisse, to do more to boost capital, adding that Credit Suisse in particular needed to act this year.
The SNB kept the target band for the Swiss franc LIBOR at 0 to 0.25%, as economists had forecast.