IMF backs franc exchange rate policy

The IMF has backed the setting of an exhange rate floor for the franc Keystone

The International Monetary Fund has backed the Swiss National Bank’s imposition of an exchange rate floor on the franc as “appropriate”.

This content was published on March 20, 2012 minutes
Sophie Douez,

However the organisation stressed that as soon as “economic conditions normalise” the SNB should revert to a free floating currency and warned that a delay could increase the risk of inflation.

The assessment came at the conclusion of an annual visit to Switzerland during which the IMF delegation held talks with the government, private sector including banks, the SNB and financial regulator Finma.

Delegation head Enrica Detragiache told reporters at a press conference in Bern on Tuesday that although the Swiss economy is fundamentally strong, it faces significant challenges associated with the ageing population and the increased risk of a housing bubble.

The IMF said the floor of SFr1.20 to the euro was an appropriate policy response to the risks of sharp economic contraction and deflation caused by a rapid appreciation of of the exchange rate. It said the move was seen as credible by the markets and had stablised the currency, thus helping to shore up the economy.

Detragiache said it was not possible to predict when the economic conditions would allow the return to a free floating currency given uncertainty in the eurozone, to which Switzerland has economic strong ties.

Bubble, bubble…

The IMF warned the Swiss housing mortgage market was in danger of overheating in some segments and banks focusing on the domestic real estate market were exposed to the effects of a potential housing bubble through both credit and interest rate risk.

It called for the “swift adoption” of tighter monitoring and supervision measures for the mortgage lending market currently under consideration by the government. It said that in addition, measures could be taken further to include the imposition of “affordability limits” on loans.

“I don’t think we are in a situation in Switzerland where we are at a peak of a bubble or close to a peak of a bubble, but on the other hand you kind of want to take measures before you reach that stage,” said Detragiache.

“From that point of view, I think that it probably is time to cool things off a bit in the Swiss mortgage market, particularly if you consider the price dynamic in some areas and segments which has been quite rapid and also the interest rate being at historically low levels to create favourable bubble conditions.”


The IMF also took aim at the financial sector, and urged authorities to press large banks – namely those deemed “too big to fail“ - to move faster to strengthen the quality of their capital which remains low “in comparison to peers and in light of risks”.

Detragiache said that the transition period for the final implementation of the Basel III capital requirements – due in 2019 - was “quite long” and at the moment banks are still operating with quite low levels of high quality capital”.

“They probably have a more favourable view of their current level of capitalisation than we have,” Detragiache said of discussions her delegation held with the banks.

Oliver Wünsch, spokesman for Finma, said the regulator was pressing the banks hard to accelerate capital requirements. He said that although 2019 was quite a long lead time, banks were required to build up capital in a “staged approach” by adding more each year.

Deputy director of the State Secretariat for International Financial Matters Alexander Karrer said Swiss authorities had “taken good note” of the IMF’s concerns about the potential for a housing bubble and capitalisation of banks.

He said the IMF’s assessment of the Swiss economy as being fundamentally strong but facing risks from uncertainty in the eurozone corresponded with local forecasts.

Thomas Moser, member of the SNB governing board, said the bank had held constructive discussions with the IMF and the two organisations were in “broad agreement”. He said the SNB was “satisfied” with the IMF’s verdict on the franc exchange rate limit.

IMF Switzerland country report, 2011

The IMF found the Swiss economy to be fundamentally strong but facing a number of challenges. It said headwinds from the eurozone debt crisis and a strong currency have slowed growth, created deflationary pressures, and force the SNB to abandon the floating exchange rate regime. It said the financial sector was adapting to new regulatory regimes but remains vulnerable, warned that low domestic interest rates are heightening the risk of a housing bubble, and pressures from the aging population are building. It recommended:

- Return to a freely floating currency once inflation goes back to confortable levels and growth picks up;

- Press large banks to move faster to strengthen the quality of their capital, which remains low in comparison to peers and in light of risks;

- Include affordability limits for mortgages in the new macroprudential toolkit to strengthen safeguards against a potential housing bubble;

- Stand ready to use the limited space available under the fiscal rules to support aggregate demand if needed. At the same time, accelerate reforms to reduce aging population costs.

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