Wednesday, February 13, 2013

Sweden keeps rate, sees low rate till '14 and positive signs

    Sweden's central bank held its benchmark repo rate steady at 1.0 percent, saying there were positive signs of stronger economic activity but the interest rate needs to remain at this low level over the coming year to support the economy and ensure that inflation rises to the bank's target.
    The Riksbank, which cut rates by 75 basis points in 2012, said a low repo rate for the next year should help push up inflation toward 2 percent by mid-2014 but it also cautioned that "household debt as a percentage of their income is still high and the risk this entails for the economy in the long run still remain."
     Sweden's economy is still affected by the euro area's crises and this will lead to weak growth in the first half of the year, but the unease on financial markets has declined and households and companies, both in Sweden and abroad, have become slightly more optimistic about the future, the bank said.
    "At the same time, developments in the emerging economies are strong and the recovery in, for instance, the United States is continuing. Altogether, this implies that Swedish GDP growth will gradually increase over the year, although there is a risk of setbacks," the executive board said.

    The Riksbank's latest forecast showed that the repo rate is first expected to rise to 1.2 percent in the first quarter of 2014, slightly down from the December forecast of 1.3 percent, and then rise to 2.0 percent in the first quarter of 2015, the same as the previous forecast. The repo rate is forecast to hit 2.7 percent by the first quarter of 2016.
     Consumer price inflation is forecast to decline to an average 0.4 percent in 2013 from 0.9 percent in 2012 and then hit 2.1 percent in 2014, below the December forecast of 2.3 percent.
    Sweden's headline inflation rate was negative for the second month in a row in December, down 0.1 percent, the same as in November.
    The upside risks to the Riksbank's repo rate forecast is that Asian and U.S. economic growth could be stronger than expected, while the repo rate path could be lower if unemployment were to rise more than expected and inflation was lower than expected.
    Sweden's Gross Domestic Product expanded by 0.50 percent in the third quarter from the second, down from the second quarter's expansion of 0.7 percent and the first quarter's 0.8 percent. The annual rate in the third quarter was only 0.70 percent.
    Two of the Riskbank's board members entered reservations against the decision to hold rates steady. Deputy Governor Karolina Ekholm wanted the rate to be cut to 0.75 percent and Deputy Governor Lars E.O. Svensson wanted the rate to be cut to 0.50 percent.


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