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IMF Urges Switzerland To Exit Franc Cap With "Great Care"

The International Monetary Fund said Tuesday that the Swiss authorities' decision to continue to defend an exchange rate floor is "appropriate" for now, but an exit from the arrangement should be exercised with "great care."

The currency cap is "appropriate in light of the slow pace of activity and remaining deflation risks," IMF said, and urged the Swiss National Bank to return to a freely floating exchange rate regime once the growth and inflation outlook normalizes.

The report also warned against the "dual risks of removing the exchange rate floor too soon or maintaining it for too long in the face of persistent capital inflows."

According to the IMF, downside risks stemming mostly from the euro area crisis and vulnerabilities in the domestic financial sector clouded Switzerland's near-term outlook. It also stressed the importance of pragmatic and flexible policy responses in the period ahead.

The economy is expected to grow 0.8 percent in 2012, picking up steam in 2013 as the contractionary effect of the exchange rate appreciation peters out. Growth in 2013 is seen at 1.7 percent.

by RTT Staff Writer

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