IMF tells Swiss to end FX cap once economy improves

Switzerland should again allow its currency to trade freely once deflationary pressures ease and growth picks up, the IMF said, while giving no more precise indication when the six-month-old cap on the franc should be lifted. As part of its annual evaluation of the Swiss economy, the results of which were published on Tuesday, the International Monetary Fund also recommended the Swiss encourage big banks to improve their capital faster.
The Swiss National Bank imposed a cap of 1.20 per euro on the soaring safe-haven franc on September 6, citing the risk of deflation and recession. Yet the economy has escaped a severe downturn and the SNB last week doubled its 2012 growth forecast to 1 percent, though it still sees falling prices this year. IMF Mission Chief Enrica Detragiache said introducing the cap on the franc had been appropriate, given the currency's rapid appreciation, but she added the ceiling on the franc should not be permanent.
"The challenge for our colleagues at the Swiss National Bank is to manage a gradual, graceful exit," Detragiache said at a news conference, adding that the Swiss economy should stabilise assuming no further shocks in the euro zone. "The precise timing is tricky," she also said, declining to spell out under what precise conditions the exit should happen.
Thomas Moser, the deputy SNB board member who has taken a seat on the governing board on an interim basis since Philipp Hildebrand resigned as chairman in January, said the central bank agreed with the IMF's conclusions. Left-wing politicians and trade unions have called for the SNB to move the cap closer to 1.30 per euro as exporters and the tourism industry continue to struggle with the strong currency, but that is seen as unlikely as the economy turns around.
Switzerland had to bail out flagship bank UBS in 2008 and is now requiring UBS and rival Credit Suisse to meet capital standards that go above and beyond the new Basel III global rules. The so-called "Swiss Finish" is expected to come into effect fully in 2019.
Striking a note similar to that of the SNB, which has led the push for the strict requirements, the IMF said big Swiss banks needed to do more. "We would welcome faster progress in raising capital levels at the major Swiss banks," Detragiache said. With Swiss monetary policy ultra-loose and domestic demand solid, real estate prices have defied the global downturn and posted strong rises in recent years. The SNB has warned of overheating, particularly around Zurich and Geneva.