Wednesday, July 3, 2013

Sweden holds rate, sees rate rise in H2 2014, growth better

    Sweden's central bank held its benchmark repo rate steady at 1.0 percent, as expected, and expects to  maintain the rate for another 12 months to support higher economic growth and inflation before starting to raise the rate gradually in the second half of 2014.
    The Riksbank, which has held rates steady this year after cutting by 75 basis points in 2012, repeated its forecast from April that the repo rate would on average be 1.0 percent this year and in 2014, and then be increased to an average of 1.9 percent in 2015.
    By the third quarter of 2015 the repo rate is seen at an average 2.0 percent and at 2.8 percent by the third quarter 2016.
    But the Riksbank has turned more confident about the outlook since its last policy meeting in April, revising upward its growth forecast and saying the "Swedish economy is on the way to a recovery" while "gradual increases in the repo rate are expected to begin during the second half of 2014."
    This compares with its statement in April when it said that "growth prospects are gradually brightening" and "increases in the repo rate are not expected to begin until the second half of 2014."
    But while the outlook for economic growth this year was revised up from April, inflation is expected to remain lower for longer than previously expected and the unemployment was seen higher.
    A cut in the repo rate could help inflation meet the Riksbank's 2.0 percent somewhat sooner but this "could lead to a further increase in the risks related to high household debt," the central bank said.

    "The monetary policy conducted is therefore considered to be a reasonable balance that stabilizes inflation and the real economy in the short turn, at the same time as taking into account more long-term risks linked to households' high indebtedness," the Riksbank said.
    The Riksbank's latest forecast calls for Gross Domestic Product to rise by 1.5 percent this year, up from April's forecast of 1.4 percent, then 2.8 percent in 2014, up from 2.7 percent, and by 3.6 percent in 2015, up from 3.5 percent.

    In the first quarter of this year, Sweden's economy expanded by a faster-than-expected 0.6 percent from the previous quarter for annual growth of 1.7 percent, the highest growth rate in six quarters.
    Sweden's export-dependent economy has been hit by the euro area's recession and the Riksbank expects exports to pick up as the global economy improves.
    Headline inflation is expected to rise by only 0.1 percent this year, unchanged from the April forecast, then rise by 1.3 percent in 2014, down from April's 1.4 percent, and by 2.6 percent in 2015, down from 2.7 percent. The Riksbank's preferred gauge of underlying inflation, CPIF, is seen at 0.9 percent this year, down from a previous forecast of 1.0 percent, then rise to 1.4 percent in 2014, the same as forecast in April, rising to 1.9 percent in 2015, down from 2.0 percent.

    In May Swedish consumer prices fell by 0.2 percent, the seventh month in a row with deflation but the Riksbank said the import prices and labour cost would rise at a faster rate when economic activity improves at the same time that companies are able to raises their prices.
    Two of the Riksbank's six board members favored cutting the repo rate to 0.75 percent, including Deputy Governor Karolina Ekholm, who has often voted for lower rates, and Deputy Governor Martin Floden, who joined the board in May and participated in his first policy meeting.


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