IMF Urges Switzerland to Consider Interest-Rate Hikes

(Bloomberg) -- The International Monetary Fund said the Swiss National Bank should soon begin to “normalize its monetary policy” after maintaining the world's lowest interest rate for the better part of the past decade. 

“After a long period of very accommodative monetary policy -- a policy rate of -0.75% since 2015 -- the time may be approaching to normalize monetary policy,” the IMF said Wednesday during its annual review of Swiss economic developments. 

While central banks elsewhere are increasing borrowing costs, economists don't predict a Swiss rate hike until mid 2023. By contrast, market are currently betting that the euro area -- which surrounds Switzerland -- will raise rates in September, December, January and March.

IMF Mission Chief for Switzerland Mark Horton told reporters in Bern that there's “not a need to move now,” but the SNB should anticipate inflation “running somewhat higher” than its current expectations.

“The SNB saw inflation moving higher to 2.1% this year before coming back to 1% in 2023,” Horton said. “We see inflation a little bit higher this year than the SNB and perhaps a little bit higher next year as well.”

The IMF said Switzerland should be able to mitigate higher inflation via the appreciation of the franc or policy rate adjustments if needed: “Inflation gaps versus the euro area and the U.S. suggest possible room for nominal franc appreciation to ease inflation pressures.” 

Urging Swiss officials to closely monitor risks related to the war in Ukraine and rising real estate prices, the IMF backed Switzerland's reactivation of the sectoral countercyclical capital buffer. Still, further measures may be needed to counter address real estate prices, it said.

“A sharp sudden tightening of financial conditions could trigger a price correction and challenges for households, banks and the Swiss economy more generally,” Horton said. 

Th IMF commended Switzerland's strong recovery from the pandemic, which it attributed to “sound, supportive and agile domestic policies.”

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