07 Sep

Sweden keeps rate steady, loose policy still needed

September 7, 2016

By CentralBankNews.info
    Sweden’s central bank left its benchmark repo rate at minus 0.50 percent, as expected, saying the outlook for the economy and inflation was largely unchanged since the board’s last meeting in July and “a continued expansionary monetary policy is needed to maintain the rising trend in inflation.”
    Sveriges Riksbank, which last cut its rate by 15 basis points in February, added that did not expect to raise the repo rate until the second half of next year when inflation is expected to be close to 2 percent and the purchase of government bonds would continue in the second half of this year, as decided in April.
    But while the Riksbank expects economic growth and inflation to continue to improve, it underlined international risks, such as the impact of the U.K. decision to leave the European Union (EU), weakness in the European banking system and the krona’s exchange rate.
    “The Executive Board, therefore, remains, as before, highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings,” it said.
    Although its monetary policy stance needs to be easy to safeguard the role of the inflation target as an anchor for prices and wages, the Riksbank added that low rates also entail the risk of higher household debt, which needs to be managed via regulatory measures.
     In its latest monetary policy report, the Riksbank maintained its forecast for the repo rate to average minus 0.50 percent this year and next before rising to zero in 2018, with the rate rising to a positive 0.1 percent by the third quarter of 2018 and then 0.6 percent by Q3 2019.
    Headline inflation in Sweden is forecast to average 1.1 percent this year, up from the July forecast of 1.0 percent, and then 1.7 percent in 2017 and 2.5 percent in 2018. The main reason for a slightly higher inflation than in 2014 is the depreciation of the krona and rising resource utilization.
    Sweden’s inflation rate rose to a 2016-high of 1.1 percent in July from 1.0 percent in June.
    The krona remains weak historically – it fell sharply in 2014 – but has been largely stable since then. Today the krona was trading at 8.45 to the U.S. dollar compared with 8.46 at the start of the year.
    The Riksbank’s forecast for Gross Domestic Product this year was lowered to 3.2 percent on average from the July forecast of 3.6 percent while the forecast for 2017 was unchanged at 2.2 percent and the 2018 forecast steady at 2.4 percent.
    In the second quarter of this year, Sweden’s GDP grew by an annual rate of 3.1 percent, down from 4.2 percent in the first quarter.

    Sveriges Riksbank issued the following statement:
 

“Inflation is rising and the Swedish economy is developing strongly. However, there is still considerable uncertainty abroad. The outlook for economic activity and inflation remains largely unchanged since July. A continued expansionary monetary policy is needed to maintain the rising trend in inflation. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.50 per cent. Not until the second half of 2017 does the Executive Board consider it to be appropriate to begin slowly increasing the repo rate. The purchases of government bonds will continue during the second half of 2016, as decided in April. 

The international recovery is fraught with uncertainty

The international recovery is proceeding at a moderate rate. Economic policy uncertainty continues to be high, among other reasons due to the result of the British referendum. Economic signals following the referendum result have not been clear-cut and it is still too early to draw any clear conclusions regarding the effects.

The Swedish economy is strong

Supported by the expansionary monetary policy, the Swedish economy has strengthened rapidly and activity is expected to continue to be strong over the next few years. CPIF inflation has shown a rising trend since 2014 and is now just below 1.5 per cent. The situation on the labour market has continued to improve and unemployment is falling. These developments will continue to have an effect on inflation with some time lag. Conditions are thus good for a continued rise in inflation.

Expansionary monetary policy to maintain the rising trend in inflation

The prospects for economic activity and inflation in Sweden remain largely unchanged since the monetary policy meeting in July and now, like then, the assessment is that a continued expansionary monetary policy is needed to maintain the rising trend in inflation. The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent. Not until the second half of 2017 does the Executive Board consider it to be appropriate to begin slowly increasing the repo rate, when inflation is expected to be close to 2 per cent. In accordance with previous decisions, purchases of nominal and real government bonds will continue so that these amount to SEK 245 billion at the end of 2016. Until further notice, maturities and coupon payments on the holdings in the government bond portfolio will be reinvested.

Readiness to do more

There are several factors that create uncertainty in the inflation forecast. These include international developments, among others the effects of the result of the British referendum and weaknesses in the European banking system. Another factor is the development of the krona. The Executive Board therefore remains, as before, highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings.
Monetary policy needs to be expansionary to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation. But the low interest rate levels also entail risks, such as increased household indebtedness. To achieve long-term sustainable development in the Swedish economy, these risks need to be managed via targeted measures within macroprudential policy, housing policy and fiscal policy.
FORECASTSFOR SWEDISH INFLATION, GDP, UNEMPLOYMENT AND THE REPO RATE*
 2015201620172018
CPI0.01.1 (1.0)1.7 (1.7)2.5 (2.6)
CPIF0.91.5 (1.5)1.9 (1.8)2.0 (2.0)
GDP4.23.2 (3.6)2.2 (2.2)2.4 (2.4)
Unemployment,
ages 15-74, per cent		7.46.9 (6.9) 6.7 (6.7)6.7 (6.7)
Repo rate, per cent-0.3-0.5 (-0.5)-0.5 (-0.5)0.0 (0.0)
*Annual percentage change, annual average
Note. The assessment in the Monetary Policy Report in July 2016 is shown in brackets.
Sources: Statistics Sweden and the Riksbank
FORECAST FOR THE REPO RATE*
 2016 Q22016 Q32016 Q42017 Q32018 Q32019 Q3
Repo rate-0.50-0.50 (-0.51)-0.52 (-0.53) -0.45 (-0.45) 0.06 (0.06) 0.57 (0.57)
*Per cent, quarterly averages
Note. The assessment in the Monetary Policy Report in July 2016 is shown in brackets.
Source: The Riksbank
The decision on the repo rate will apply with effect from 14 September. The minutes from the Executive Board’s monetary policy discussion will be published on 21 September. A press conference with Governor Stefan Ingves and Mattias Erlandsson, Acting Deputy Head of the Monetary Policy Department, will be held today at 11 a.m. at the Riksbank. Press cards must be shown. The press conference will be webcast live at www.riksbank.se.”

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