By CentralBankNews.info
Sweden’s central bank left its benchmark repo rate at minus 0.50 percent, as expected, and confirmed that it still expects to raise the rate by 25 basis points in December or February if the economy continues to evolve in a way that supports the prospects for inflation.
Sveriges Riksbank, which has kept its rate steady since February 2016, said the economy had developed largely as it forecast in September, and while inflationary pressures are still moderate there are signs of rising inflationary pressures and conditions are good for inflation to remain close to its 2.0 percent target in coming years.
In its latest monetary policy report, the Riksbank maintained its forecast for the repo rate to rise to an average minus 0.10 percent during 2019 – implying two rate hikes – from minus 0.50 percent this year and then rise further to a positive 0.4 percent in 2020 and 2.0 percent in 2021.
“All in all, the assessment of the Executive Board is that monetary policy needs to proceed cautiously and be expansionary for a long period of time to come,” the Riksbank said.
The Riksbank, which like the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank used asset purchases as a monetary tool in recent years, also said it would continue to reinvest coupon payments from its bond portfolio until further notice.
The Riksbank’s forecast for inflation with a fixed interest rate was unchanged in its latest policy report while the forecast for economic growth was lowered.
Inflation is seen averaging an unchanged 2.2 percent this year, then 2.1 percent in 2019, 1.9 percent in 2020 and 2.0 percent in 2021. Core inflation rose to 2.5 percent in September from 2.2 percent in previous three months, boosted by higher energy prices.
Gross domestic product is seen averaging 2.3 percent this year, down from September’s forecast of 2.9 percent and then 1.9 percent in 2019, down from 2.0 percent. In 2020 the economy is seen growing by 2.0 percent, down from 2.1 percent forecast in September and then 1.8 percent in 2021.
The downward revision in growth was mainly due to an downward adjustment of national accounts from 2016 to reflect higher imports and lower investments that previously published.
“The Riksbank still, with the aid of a number of indicators, makes the assessment that economic activity in Sweden is and has been strong in recent years,” the monetary policy report said.
In the second quarter of this year Sweden’s GDP grew 2.5 percent year-on-year, down from 2.8 percent in the previous quarter, with only marginal effects seen from global trade disputes.
As in the past, the Riksbank pointed to the need for the krona’s exchange rate to develop in a way that helps keep inflation up, signaling that it is quite comfortable with the current krona weakness.
Against the U.S. dollar, the krona has weakened this year and was trading at 9.09 today, down 10 percent this year. Against the euro, the krona has depreciated 5.2 percent this year and was trading at 10.36 today.
As in September and July two of the Riksbank’s six board members – Henry Ohlsson and Martin Floden – entered reservations against the policy decision, with both calling for a 25-point rate hike today.
Although inflation is now above the Riksbank’s target, it is clearly being very cautious in tightening its policy.
The Riksbank’s last rate hike was in July 2011 following a tightening campaign from July 2010 in which the repo rate was raised 175 basis points to 2.0 percent.
But the rate hikes came against a backdrop of a flaring up of the sovereign debt crises in the euro zone that engulfed Greece, Ireland, Cyprus, Italy, Portugal and Spain.
By December 2011 the Riksbank acknowledged that fiscal tightening in the euro area was hitting Swedish exports and changed course. The Riksbank’s move largely mirrored that of the European Central Bank, which started its easing cycle in November 2011 after a brief 7-month tightening cycle.
The Riksbank’s tightening cycle in 2010/11 was met by much criticism, including economist Paul Krugman who borrowed a phrase and described the rate hikes as “sadomonetarism in action.”
The Riksbank’s easing cycle not only involved cutting the key rate by a total of 2.50 percentage points to a negative 0.50 percent by February 2016 but also included bond purchases to hold down long-term interest rates. Its bond holdings amount to about 330 billion krona.
Flooding the banking system with liquidity by buying government bonds was first pioneered by the Bank of Japan in 2001 but then became a mainstay of major central banks.
Sveriges Riksbank issued the following press release: (Tables excluded)