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IMF says time may be approaching for SNB to tighten policy

© Reuters. FILE PHOTO: The International Monetary Fund logo is seen inside its headquarters at the end of the IMF/World Bank annual meetings in Washington, U.S., October 9, 2016. REUTERS/Yuri Gripas

ZURICH (Reuters) – Risks of rising inflation could prompt the Swiss National Bank to start exiting its ultra-loose monetary policy, the International Monetary Fund (IMF) suggested on Wednesday.

Although uncertainty remains high, the pickup of inflation is expected to be temporary, with inflation returning to the SNB’s 0%–2% target band in the first half of 2023, the IMF said in a review of the Swiss economy, putting inflation at 2.5% in 2022 and 1.6% in 2023.

The Swiss franc’s appreciation has mitigated price rises and wage pressures appeared muted despite a tight labour market.

“But there are risks of inflation rising further and becoming more persistent. The SNB should continue to closely monitor inflation developments and prospects, including at the international level,” it said.

“After a long period of very accommodative monetary policy — a policy rate of -0.75 percent since 2015 — the time may be approaching to normalise monetary policy,” it added.

The SNB said last month while keeping policy on hold it would take “all necessary measures” to tackle higher prices, indicating a shift in tone at the central bank that for years has battled to tame the safe-haven franc’s strength.

Inflation gaps versus the euro area and the United States suggest possible room for nominal franc appreciation to ease inflation pressures, the IMF said.

It forecast the Swiss economy, which it said had weathered the COVID-19 pandemic well, to grow around 2.25% this year and just under 1.5% in 2023 as spillover from the war in Ukraine weighs.

The IMF said capital and liquidity buffers protected the Swiss financial system during the pandemic, but warned a sharp rise in interest rates could trigger a property market correction that could hit banks’ balance sheets.

It also recommended that authorities strengthen their evaluation of big banks’ internal governance and risk assessment.

IMF says time may be approaching for SNB to tighten policy

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