SNB Must Stay Nimble for Hike or Cut to Negative Rate, IMF Says
(Bloomberg) — The Swiss National Bank must stay ready to either raise or cut interest rates if economic circumstances require it, the International Monetary Fund said.
In its annual assessment of the country, the Washington-based fund said that central-bank officials should stay nimble if the situation requires a change in settings. That would mean either making the level of borrowing costs positive, or else negative, considering that the the SNB is currently at the lower bound of zero.
“The monetary policy stance is appropriate, but high uncertainty warrants maintaining flexibility to adjust policy rates in either direction,” the IMF said on Thursday.
The fund’s assessment highlighted the spectrum of pressures bearing down on Switzerland despite what its officials stress is a notably resilient economy. Haven inflows have stoked the strength of the franc, but also kept consumer prices in check, but either of those aspects could change in the future, it warned.
“Under a stagflation scenario triggered by a sharp and sustained rise in energy prices, higher interest rates might be necessary,” the IMF said, before adding that in “a severely disinflationary demand shock” then “negative interest rates, despite possible financial system distortions, are the strongest of the SNB’s policy options.”
Overall, the fund praised the central bank’s framework, noting that the 0-2% inflation range that officials target is “highly credible,” and that consumer views are anchored in the middle of that.
“The SNB should avoid allowing expectations to drift too far below this level, as this would weaken monetary policy effectiveness and raise financial stability risks,” the IMF advised. “Clear communication — signaling a willingness to keep rates low or negative and to deploy FX interventions — would be key.”
A week ago, the SNB tweaked its messaging on the franc, restating that officials maintain an increased willingness to intervene in the currency but slightly softening the language. The central bank also kept its rate at zero.
The IMF did caution that there’s only so much that selling the franc can achieve, cautioning that “foreign exchange intervention can also be an effective tool in specific cases, but has limitations.”
The central bank meanwhile took the fund’s comments as backing to its approach.
“We note that the IMF supports our monetary policy stance,” SNB official Rosmarie Schlup told reporters in Bern.
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