By CentralBankNews.info
    Sweden’s central bank left its benchmark repo rate unchanged at minus 0.35 percent along with its plan to purchase government bonds totaling 135 billion Swedish crowns by the end of this year, but underscored that it “remains highly prepared to make monetary policy even more expansionary in the event of inflation prospects deteriorating.”
    Sveriges Riksbank, which has cut its repo rate by 35 basis points this year – most recently by 10 basis points in in July – said its expansive monetary policy was resulting in improving economic activity and rising inflation but international developments and turbulence in financial markets was creating uncertainty, making it difficult to assess how the crown’s exchange rate will evolve.
    And while the decline in oil prices could still affect long-term inflationary expectations in a more substantial way, the Riksbank added this risk was now smaller than earlier in the year when inflation was lower and expectations were falling.
    Sweden’s consumer price inflation rate improved to minus 0.1 percent in July, up from minus 0.4 percent in June, and in its latest monetary policy report the Riksbank revised downward its forecast for inflation this year to average 0.0 percent from 0.2 percent forecast in July.
   But for 2016 inflation is seen averaging 1.8 percent, down from the previous forecast of 2.0 percent. For 2017 inflation is seen at 2.8 percent, up from July’s forecast of 2.7 percent. In 2015 the inflation rate averaged minus 0.2. percent.
    “The trend of rising inflation is expected to continue,” the Riksbank said, adding that jobless is now seen falling to 7.6 percent on average this year compared with July’s forecast of 7.7 percent, and then fall to 7.2 percent in 2016 and 6.9 percent in 2017.
    While the central bank’s forecast for the repo rate was largely unchanged – it is still expected to average 0.35 percent on average this year and in 2016 – the path of the repo rate reflects the possibility of a lowering in the event that the prospects for higher inflation worsen.
     On average, the forecast for the repo rate was lowered to minus 0.34 percent in the third quarter of this year compared with July’s forecast of minus 0.37 percent while the forecast for the fourth quarter was lowered to minus 0.39 percent from 0.41 percent.
     Economic activity in Sweden is continuing to strengthen with Gross Domestic Product in the second quarter of this year up by a quarterly 1.0 percent compared with 0.4 percent in the first quarter. On an annual basis, growth rose by 3.0 percent in the second quarter.
     Following last month’s upward revision of growth forecasts by Sweden’s finance ministry, the Riksbank raised its 2015 GDP forecast to 3.1 percent from July’s 2.9 percent, but trimmed the 2016 forecast to 3.4 percent from 3.6 percent. For 2017 growth was seen unchanged at 2.6 percent.
    The improving outlook for Swedish growth has helped reverse last year’s steady decline in the value of the Swedish crown, with the crown rising further following today’s Riksbank decision.
  The crown was quoted at 8.36 to the U.S. dollar today, up from yesterday’s 8.44, but still down 6.7 percent since the start of the year.
     Despite the overall optimistic outlook by the Riksbank, it repeated its call for Swedish politicians to act to reduce the risk that its expansionary policy will boost house prices and encourage further debt by the country’s households.
    “If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy,” warned the Riksbank.

       Sveriges Riksbank issued the following statement:

“Economic activity in Sweden is strengthening and inflation is showing a clear upward trend. Even though uncertainty continues to be high internationally, the economic outlook and inflation prospects remain largely unchanged since the monetary policy decision published in July. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.35 per cent. The expansionary monetary policy, with a negative interest rate and the previous decision to purchase government bonds until the end of the year, is supporting the continued positive development of the Swedish economy so that CPIF inflation can be expected to be close to 2 per cent in 2016. The Riksbank remains highly prepared to make monetary policy even more expansionary in the event of inflation prospects deteriorating.

Recovery in an uncertain world
The recovery abroad is continuing. Growth improved in the United States and the United Kingdom in the second quarter, at the same time as the euro area continued to grow at a moderate pace. However, uncertainty over economic developments abroad remains high. This is illustrated by the summer’s fall in oil prices and the recent wide fluctuations on the equity and foreign exchange markets resulting, among other things, from unease over developments in China and other emerging markets.

Monetary policy is having an effect – inflation is rising
The expansionary monetary policy in Sweden is contributing to the continuing strengthening of economic activity and the gradual improvement of the situation on the labour market. Inflation has risen since last autumn and CPIF inflation was 0.9 per cent in July. Excluding energy, CPIF inflation amounted to 1.5 per cent. The trend of rising inflation is expected to continue. It is true that the fall in oil prices and the low electricity prices in Sweden will restrain CPIF inflation in the near future, but inflation is nevertheless expected to rise clearly. The forecast for the CPIF excluding energy remains basically unchanged from the Monetary Policy Report in July.

Low repo rate so inflation can rise towards the target
Inflation is rising, the Swedish economy is developing strongly and revisions to the forecasts are small overall. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.35 per cent. In addition, the Riksbank will continue to purchase government bonds until the end of the year, according to the plan announced in July. The repo rate is expected to be −0.35 per cent for about one year, while the repo-rate path reflects the possibility of lowering the repo rate further.

Risks for inflation
Developments abroad entail continued risks to the development of inflation. The recent weeks’ turbulence on the financial markets is creating uncertainty, making it difficult to assess the development of the krona in this environment. There is also a risk that the fall in oil prices could affect long-term inflation expectations in a more substantial way. However, the risk of this is deemed to be smaller now than earlier this year, when inflation was lower and inflation expectations had been falling for a time.

Readiness to do more
It is important that inflation continues to rise and come closer to 2 per cent. Such a development helps to create long-term inflation expectations that are compatible with the inflation target. The Riksbank consequently continues to maintain a high level of preparedness to rapidly make monetary policy even more expansionary, even between the ordinary monetary policy meetings, if this becomes necessary. The repo rate can be cut further and the government bond purchases can be extended. The Riksbank is also prepared to intervene on the foreign exchange market if the upturn in inflation should be threatened as the result, for instance, of a very problematic development in the markets. The purchase of other types of securities and the launch of a programme for lending to companies via the banks may also come into question.

Risks associated with household indebtedness must be managed
Monetary policy now needs to be very expansionary to bring inflation towards the target and to reduce the risks associated with a situation in which inflation is too low. At the same time, however, the low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. Current debt levels already pose a substantial risk to the Swedish economy. It is thus essential that the Riksdag (the Swedish parliament), the Government and other authorities implement measures to reduce this risk. If no measures are taken, this, in combination with the low level of interest rates, will further increase the risks, which may ultimately be very costly for the economy. “

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