Thursday, September 5, 2013

Sweden holds rate, confirms steady rate till end-2014

    Sweden's central bank held its repo rate steady at 1.0 percent and confirmed that it did not expect to raise it until the end of next year, but voiced increasing confidence about the economic prospects, saying "there are now increasing signs confirming that economic activity is beginning to improve."
    The Riksbank, which has held rates steady this year after cutting by 75 basis points last year, trimmed its Gross Domestic Product forecast for this year to 1.2 percent from July's forecast of 1.5 percent and for growth next year to be 2.7 percent compared with July's 2.8 percent.
    "The repo rate needs to remain at the current level until economic activity is showing a clearer improvement and inflation has risen for a while. As before, the repo rate is not expected to be raised until the end of 2014," the central bank said.
    At its previous meeting in July, the Riksbank first started to voice confidence about the outlook, saying the country's economy was on the way to a recovery and it expected to start raising the repo rate in the second half of 2014.
    The Riksbank said there were signs that the recovery in the euro area had begun - though it will take several years - and the prospects for continuing recovery in the United States were good while emerging markets were slowing down after several years of very high growth.

    "The recovery abroad will contribute to brighter prospects for the Swedish economy," the central bank said, adding that household and corporate confidence has risen and labour market developments have been better than expected.
    Stronger international activity should support Swedish exports at the same time as household consumption rises faster so overall economic growth should gradually improve, the bank said.
    Sweden's Gross Domestic Product contracted by 0.1 percent in the first quarter from the previous quarter and on an annual basis GDP rose by only 0.6 percent, down from 1.7 percent in the fourth quarter.
    But the unemployment rate fell to 7.2 percent in July from 9.1 percent in June and the Riksbank forecast that the jobless rate will average 8.1 percent his year, down from July's forecast of 8.2 percent,  and then fall to 7.9 percent in 2014, down from July's forecast of 8.1 percent.
    Sweden's inflation rate also turned positive in July with prices up 0.1 percent, reversing deflation in the last nine months, but is expected to remain just over 1 percent in the near term.
    By 2015 inflation should reach the Riksbank's 2 percent target.
    "An even lower repo rate could lead to inflation attaining the target slightly sooner," the bank said, but cautioned that this could lead to higher risks to households' high debt when rates rise.
    "The monetary policy being conducted now is expected to stimulate economic developments and contribute to inflation rising towards 2 percent, at the same time as taking into account the risks linked to households' high indebtedness," the Riksbank said, adding it welcomes government proposals for a stronger framework for financial stability.
    Last week the Swedish government gave the Financial Supervisory Authority (FSA) the lead responsibility for new financial stability tools, including capital requirements for banks, ending months of wrangling over whether the Riksbank or the FSA should be responsible for financial stability.
    As in July, two of the Riksbank's six board members voted to cut the repo rate to 0.75 percent. Riksbank Deputy Governor Karolina Ekholm, who has often voted for a cut in recent month, along with Deputy Governor Martin Floden, who only joined the board in May.


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