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Foreign Exchange

IMF urges Switzerland to abandon currency floor

The International Monetary Fund (IMF) has called for the Swiss National Bank (SNB) to remove the floor it imposed in EURCHF when economic conditions normalize.

The SNB imposed a SFr1.20 floor in EURCHF in September in a bid to stem the rise of the franc, which it described as “excessively” overvalued. The move came after the franc rose to a record high against the euro, as fears over eurozone government debt stoked haven demand for the Swiss currency.

In its annual review of the Swiss economy, the IMF said the introduction of the exchange rate floor was an appropriate policy response to the risk of a sharp economic contraction and deflation caused by a rapid exchange-rate appreciation.

It added, the SNB exchange-rate commitment, which was seen as credible by the markets, had stabilized the currency and was thus helping shore up the economy.

Once economic conditions normalize, however, the IMF said a return to a freely floating currency would be desirable.

“While the exchange rate floor has been successful, once an economic recovery gets under way and deflation risks recede, the SNB should move back to a free float,” the IMF says in a statement.

“Delaying exit could carry the risk of stoking inflation, especially in case money supply has to be expanded pro-cyclically to absorb renewed capital inflows.”

The Swiss economy has managed to avoid an acute downturn and the SNB last week doubled its growth forecast to 1%, although it still predicts deflation in the economy.

Enrica Detragiache, IMF mission chief, said the Swiss economy should stabilize, assuming no further shocks in the eurozone, and that the floor in EURCHF should not be permanent.

“The challenge for our colleagues at the Swiss National Bank is to manage a gradual, graceful exit," she says. “The precise timing is tricky.”

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