(This version of the September 26th story has been refiled with IMF clarification of Van Elkan comments in paragraph 8)

By John Revill

BERN (Reuters) - Switzerland's central bank should adjust its policy to favor negative interest rates rather than currency interventions as it seeks to weaken the Swiss franc's appeal, the International Monetary Fund said on Monday.

The Swiss National Bank's twin policy of negative rates and intervention has helped reduce deflationary pressures in the country and to weather last year's surge in the franc, the IMF said in its annual assessment of the Swiss economy.

But the central bank should consider deeper negative rates or cutting the existing threshold for deposits now exempt from negative interest in order to make the franc even less attractive as a safe haven currency, said Rachel van Elkan, IMF Mission Chief.

"There's room to go down further," van Elkan told a press conference in Bern. "If there are sustained small-scale inflows, that is better addressed by interest rates than foreign exchange interventions."

The SNB currently charges a rate of -0.75 percent on deposits it holds for commercial banks. The policy has been criticized by Swiss politicians and bankers and has also made life tough for pension funds and insurers by reducing returns on their investments.

Van Elkan said focusing on negative interest rates or trimming the exemption threshold would help reduce the risks for the SNB's interventions, which had increased its foreign currency investments to 640 billion francs by the end of July.

"There is not an upper limit (to the balance sheet) per se, but growing the balance sheet has rising costs," she said.

Van Elkan said her comments were limited to subtle refinements of the SNB's current policy. When asked if the rates should down to -1 percent or -1.25 percent, she said her suggestions amounted to "nothing of that scale".

The IMF later clarified that she meant she did not think the policy interest rate should go down by a further 1 percentage point or more.

Thomas Moser, an alternate member of the SNB's governing board, said negative interest rates and interventions were blunt instruments, but the bank was satisfied with its policy.

"Currently we are fine with the balance of the two instruments but of course if there should be a change of the situation, we would reconsider," Moser said.

Earlier the IMF gave its forecasts for the Swiss economy, saying it expected growth of 1.5 percent in 2016 before stabilization at around 1.75 percent in the medium term.

The IMF, a 189-country group that seeks to boost monetary cooperation, said Switzerland had weathered "relatively well" the sharp appreciation in the franc when the SNB scrapped its minimum exchange rate versus the euro in January 2015.

(Reporting by John Revill; Editing by Michael Shields and Mark Trevelyan)