By CentralBankNews.info
Sweden’s central bank left its benchmark repo rate steady at minus 0.25 percent, as expected, and confirmed it still expects to raise its rate in the second half of this year to keep inflation around its target despite uncertainty over the strength of the global economy and a dampening of sentiment in Swedish households and business.
Sveriges Riksbank, which in December 2018 raised its repo rate for the first time since July 2011, maintained its forecast to raise the repo rate about twice a year, each time by 25 basis points, through 2021 when it reaches 0.8 percent on average from 0.3 percent in 2020.
But the Riksbank also said monetary policy continues to be expansionary to support economic activity, underlining the need to “proceed with caution” and adding “it is the economic outlook and inflation prospects that will determine future monetary policy.”
The Risksbank maintained its forecast for inflation to remain stable around its 2.0 percent target in coming years, but lowered its growth forecast for this year to 1.3 percent from December’s forecast of 1.5 percent and the 2020 forecast to 1.9 percent from 2.0 percent.
The 2021 growth forecast was kept unchanged at 1.8 percent.
“Growth abroad has slowed down, but economic activity will continue to be good over the next few years, with low unemployment and rising wage growth in many countries,” the Riksbank said, adding Sweden’s labour market has been slightly stronger than expected, unemployment is at its lowest in a decade and inflation and inflation expectations are now established around 2 percent.
The rate hike in December was the Riksbank’s first change in its policy rate since February 2016 when it wrapped up an easing cycle that saw rates steadily drop from 2.0 percent in December 2011 in the wake of Europe’s sovereign debt crises.
In addition to the rate cuts, the Riksbank also embarked on bond purchases, known as quantitative easing, in February 2015 but took the first small step toward normalizing its monetary policy in December 2017 by letting the asset purchase program expire.
The Riksbank confirmed that it will continue to reinvest payments and coupons from its portfolio of government bonds until further notice.
At the end of January the Riksbank’s bond holdings amounted to close to 355 billion Swedish krona, up from 290 billion in December 2017, based an earlier decision that large principal payments in the first half of 2019 will be distributed evenly across the period from January 2018 to June 2019 so the bond portfolio will continue to rise until March this year when a large principal payment is due that will then reduce its holdings.
At its next meeting in April, the bank’s executive board will decide how to manage future principal payment.
The Riksbank also said its board had decided not to extend its mandate, which expired on Jan. 12, that allows its to rapidly intervene in the foreign exchange market.
The board’s mandate was originally adopted in January 2016, when inflation and inflation expectations were far below 2 percent and a rapid rise in the krona’s exchange rate was seen as “an acute threat” to keeping confidence in the inflation target.
Sweden’s headline inflation rate was steady at 2.0 percent in December and November while economic growth in the third quarter, as expected, cooled to annual growth of 1.6 percent in the third quarter of last year from 2.7 percent in the second quarter.
The krona, which has declined steadily against the U.S. dollar since February 2018, has firmed this month but was still trading at 9.21 to the dollar today, down 2.5 percent this year.
Sveriges Riksbank issued the following statement (excluding tables):