Tuesday, December 18, 2012

Sweden cuts rate 25 bps, sees repo steady at 1.0% in 2013

    Sweden's central bank cut its benchmark repo rate by 25 basis points for the third time this year due a weakening economy and said it expects to keep the rate at 1.0 percent for the coming year.
    The Riksbank, which has now cut rates by a total of 75 basis points this year, said the rate cut should help support the economy so inflation starts to rise towards the bank's 2.0 percent target.
    "The risks entailed in household's high level of indebtedness remain, but given the weaker economic activity and lower inflation, the Executive Board of the Riksbank assesses that it is appropriate to cut the repo rate," the bank said in a statement.
    The Riksbank also revised further downwards it growth and inflation forecasts, expecting 1.2 percent growth in Gross Domestic Product in 2013, down from its October forecast of 1.8 percent, but kept its forecast for 2.7 percent growth in 2014 and raised its 2015 forecast to 3.2 percent from 2.9 percent.
    The bank retained its 2012 GDP forecast of 0.9 percent, down from 3.7 percent in 2011.
    The repo rate is expected to average 1.0 percent in 2013, down from its previous forecast of 1.2 percent, 1.5 percent in 2014, down from 1.7 percent, and 2.2 percent in 2015, down from 2.3 percent.
    The rate cut was widely expected due to the weakening economy but the Riksbank is clearly concerned about rising household debt, an important reason for holding rates steady in October. At that meeting, it also said a rate cut was more likely this year than a rate hike.
    Sweden's GDP expanded by 0.5 percent in the third quarter from the second for annual growth of 0.7 percent, down from a rate of 1.3 percent in the second
    "The weak developments in the euro area are having a clear effect on the Swedish economy," the bank said, adding that international trade has been weak for some time, the outlook by households and companies is more gloomy and consumption and investments are weak.
    The labor market has also deteriorated and wage increases are expected to be lower, which will contribute to low inflationary pressures.
    Consumer prices fell by an annual rate of 0.1 percent in November and the Riksbank maintained its forecasts for average inflation of 0.9 percent for the year, down from 3.0 percent in 2011. It cut its 2013 inflation forecast to 0.3 percent from 0.7 percent. But by 2014 inflation is expected to return to 2.3 percent, down from its previous forecast of 2.4 percent and rise by 2.6 percent in 2015, down from 2.7 percent.
    One of the Riksbank's board members, Deputy Governor Lars Svensson, wanted to cut the repo rate by 50 basis points to 0.75 percent now and then push the rate down to 0.5 percent from the second quarter of 2013 through the first quarter of 2014.



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