By www.CentralBankNews.info Sweden’s central bank held its benchmark repo rate steady at 1.0 percent, saying economic prospects were gradually brightening but monetary policy needs to remain “very expansionary” until the second half of 2014 because it will take longer time for inflation to start to rise toward the bank’s target.
Although the Riksbank raised its forecast for economic growth this year, it cut its forecast for inflation, saying inflation was low due to weak demand, the stronger value of the Swedish krona in recent years and because companies have more difficulty in passing on higher costs to consumers.
“Gradual increases in the repo rate are not expected to begin until the second half of 2014, which is around a year later than earlier forecast,” the Riksbank said.
The Riksbank, which cut rates by 75 basis points in 2012, forecast an average repo rate of 1.0 this year and in 2014, down from its February forecast for a 1.5 percent repo rate in 2014. For 2015 the repo rate is now forecast to rise to 1.9 percent, down from a previous forecast of 2.2 percent.
An even lower repo rate today would help inflation speed up toward the bank’s 2.0 percent target but “at the same time it would further increase the risk of imbalances building up,” the bank said.
“The monetary policy conducted is expected to stimulate the economy and inflation at the same time as taking into account the risks linked to households’ high indebtedness,” it added.
The decision to hold rates steady was widely expected by economists.
The Riksbank forecast that Gross Domestic Product would rise by 1.4 percent this year, up from February’s forecast of 1.2 percent, then by an unchanged forecast of 2.7 percent in 2014, and then by 3.5 percent in 2015, up from a previous forecast of 3.1 percent.
Earlier this month, the Swedish finance ministry forecast 2013 growth of 1.2 percent and 2014 growth of 2.2 percent. It also forecast that the repo rate would remain at 1.0 percent through 2014 and then rise to 1.75 percent by the end of 2015.
In 2012 the Swedish economy expanded by 0.8 percent and in the fourth quarter of last year, GDP stagnated from the third quarter for annual growth of 1.4 percent, up from a rate of 0.7 percent in third quarter.
Consumer price inflation is forecast by the Riksbank at only 0.1 percent on average this year, down from a previous forecast of 0.4 percent, and then rise by 1.4 percent in 2014, down from a previous forecast of 2.1 percent, before inflation rises to 2.7 percent in 2015.
Deflation has started to take hold of Sweden with consumer prices unchanged in both March and January and down by 0.2 percent in February. In both November and December, inflation was a negative 0.1 percent, respectively.
The Riksbank said the global economy was growing “at a relatively good pace,” with growth in the U.S. continuing and Asian developments strong. This is in contrast with economic crises in the euro area along with uncertainty and weak growth.
“After a weak outcome at the end of last year, the Swedish economy is now showing a gradual recovery,” the Riksbank said, adding that sentiment among households and companies is picking up, and consumption and investments is expected to increase more quickly in the coming period.
But the Riksbank cautioned that these brighter prospects, together with low interest rates, had boosted house prices and this is “expected to continue and to contribute to a faster increase in household debt in the coming period than was forecast earlier.”
As at its previous meeting in February, two of the Riksbank’s board members had wanted the bank to cut rates. Deputy Governor Karolina Ekholm again wanted to cut the rate to 0.75 percent while Deputy Governor Lars E.O. Svensson again wanted the rate cut to 0.50 percent.
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