Sweden’s central bank left its key repo rate steady at minus 0.25 percent, as widely expected, but delayed any further tightening of its monetary policy stance by pushing back the time for its next rate hike until the end of this year or early next year to ensure inflation remains around its target.
Sveriges Riksbank in December 2018 raised its rate for the first time in 7-1/2 years and had planned to raise the rate a second time in the second half of this year as economic activity has remained solid and inflation is close to the bank’s 2.0 percent target.
“However, the outcomes in recent months imply that inflationary pressures are a little weaker than expected,” and together with lower inflation abroad – especially in the euro area – this indicates inflation will be lower in coming years, the Riksbank said, adding:
“The repo rate is expected to be raised again towards the end of the year or at the beginning of next year and rate rises thereafter are expected to occur at a somewhat slower pace.”
The Riksbank forecast the repo rate would average minus 0.2 percent this year, the same as it forecast in February, and then rise to 0.1 percent in 2020, down from its earlier forecast of 0.3 percent, and then 0.5 percent in 2021, down from 0.8 percent.
Underscoring its continued expansionary monetary policy, the Riksbank also nsaid it would purchase government bonds at a nominal value of 45 billion Swedish crowns, or krona, between July 2019 and December 2020, an amount equal to around half of the payments and coupons it will receive on its current stock of government bonds.
As other major central banks, the Riksbank has used asset purchases – known as quantitative easing – as an additional easing tool since the global financial crises to hold down bond yields.
The Riksbank first began buying bonds in February 2015 but concluded this program in December 2017. Since then it has continued to reinvest principal payments and coupons, and at the end of March its bond holdings amounted to 316 billion krona, down from 355 billion at the end of January but up from 290 billion in December 2017.
The decision to buy 45 billion krona of bonds means the Riksbank will maintain its level of holdings close to the average level since net purchases were concluded and is part of its strategy of gradually normalizing monetary policy.
In December 2020 the Riksbank’s board will decide if it wants to continue to purchase bonds and in the long run it expects its holdings to be smaller than today but the exact size is unclear.
Sweden’s inflation rate has fluctuated around 2.0 percent since mid-2017 but the Riksbank said continued low inflation and low interest rates abroad, along with uncertainty over global developments “emphasize that there is a need to proceed with caution in monetary policy.”
Headline inflation in Sweden was steady at 1.9 percent in the first three months of this year and is seen averaging 2.0 percent this year, down from its previous forecast of 2.2 percent,
Next year inflation is forecast to rise to 2.3 percent in 2020, down from 2.6 percent previously forecast, and then to rise to 2.6 percent in 2021, down from 3.0 percent.
Sweden’s economy grew faster than expected in the fourth quarter of last year, partly due to a bounce-back from a weak third quarter, but is now expected to enter a period of lower growth due to slower demand for its exports and an easing of domestic demand from lower housing investment.
Gross domestic product is estimated to have expanded 2.3 percent in 2018 but is then expected to slow to 1.7 percent in 2019 but this is about its February forecast of 1.3 percent.
The Riksbank’s forecast for 2020 and 2021 GDP growth are unchanged, at 1.9 percent and 1.8 percent, respectively.
In response to the Riksbank’s decision, the krona fell almost 1-1/2 percent to 9.55 to the U.S. dollar, the lowest level since mid-2002, and is now down almost 6 percent this year.
Two of the Riksbank’s deputy governors, Martin Floden and Henry Ohlsson, did not agree with the decision to buy bonds from July through December next year, saying there are risks associated with these purchases and they don’t contribute to reaching the monetary policy target “in a clear way,” according to the bank’s release.
Sveriges Riksbank released the following press release:
“Activity in the Swedish economy is high and inflation is close to the target of 2 per cent. The strong economic activity in Sweden indicates that inflation will remain close to target going forward but recent outcomes suggest that inflationary pressures are slightly weaker than expected. The Executive Board has decided to hold the repo rate unchanged at –0.25 per cent and assesses that the rate will remain at this level for a somewhat longer period of time than was forecast in February. The repo rate is expected to be raised again towards the end of the year or at the beginning of next year and rate rises thereafter are expected to occur at a somewhat slower pace. The Executive Board has also decided that the Riksbank will purchase government bonds for a nominal value of SEK 45 billion from July 2019 to December 2020.
| 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|
| CPI | 2.0 (2.0) | 2.0 (2.2) | 2.3 (2.6) | 2.6 (3.0) |
| CPIF | 2.1 (2.1) | 1.8 (2.0) | 1.8 (1.8) | 1.9 (2.0) |
| GDP | 2.3 (2.2) | 1.7 (1.3) | 1.9 (1.9) | 1.8 (1.8) |
| Unemployment, per cent | 6.3 (6.3) | 6.4 (6.3) | 6.5 (6.5) | 6.6 (6.6) |
| Repo rate, per cent | −0.5 (−0.5) | −0.2 (−0.2) | 0.1 (0.3) | 0.5 (0.8) |
| 2019 Q1 | 2019 Q2 | 2020 Q2 | 2021 Q2 | 2022 Q2 | |
|---|---|---|---|---|---|
| Repo rate | –0.27 (–0.27) | –0.25 (–0.24) | 0.04 (0.23) | 0.42 (0.73) | 0.80 |