Tuesday, December 17, 2013

Sweden cuts rate 25 bps, pushes back rate rise until 2015

    Sweden's central bank cut its benchmark repo rate by 25 basis points to 0.75 percent and pushed back any rate rises until early 2015 from late 2014 due to lower-than-expected inflation.
    The Riksbank, which last cut its rate in December 2012, said economic activity was largely as forecast but inflationary pressures were expected to remain much lower than forecast in October and the cut in the repo rate should help boost inflation towards the bank's 2 percent target by 2015.
    "Slow increases in the repo rate are not expected to begin until the start of 2015," the Riksbank said, adding that "the risks linked to high household indebtedness remain, but the low inflation rate justifies cutting the repo rate."
    In October the bank said it first expected to raise the repo rate by the end of 2014, forecasting an average rate of 1.15 percent by the fourth quarter of 2014 and 2.24 percent end-2015. In its new forecast, the central bank forecast an average rate of 0.71 percent in the fourth quarter of next year, 1.88 percent in the fourth quarter of 2015 and 2.88 percent in fourth quarter 2016.
    Sweden's postponement of any rise rise to next year comes less than two weeks after Norway's central bank delayed any rate rise by a year to the summer of 2015, citing low inflation, low growth and declining house prices.

    Economists were split in their expectations to the Riskbank's decision today, with roughly half expecting rates to be maintained and the other half expecting a rate cut.

    In its latest forecast, the Riksbank sees Sweden's consumer price inflation dropping by an average of 0.1 percent this year, down from a forecast of zero inflation in October, then rising by 0.6 percent in 2014, down from a previous forecast of 1.2 percent and then by 2.5 percent in 2015, down from a previous forecast of 2.7 percent.
    Cost pressures in Sweden have been higher than inflation, indicating that "companies have had difficulty in passing on their higher costs through higher prices, which in turn may be due to weak demand," the Riksbank said.
    Sweden's inflation rate was 0.1 percent in November, up from minus 0.1 percent in October.
    "Without a more expansionary monetary policy, there is a risk that inflation would not reach 2 percent in the coming years, and there is thus good reason to cut the repo rate by 0.25 percentage points and to adjust the repo-rate path downwards," the bank said.
    While inflation in Sweden and throughout Europe has been below expectations - triggering a surprise rate cut by the European Central Bank (ECB) last month - economic growth is largely as expected.
    The Riksbank even raised its forecast for average growth in Sweden's Gross Domestic Product this year to 0.9 percent from a previous forecast of 0.7 percent. In 2012 Sweden's economy expanded by 0.9 percent.
    In the third quarter of this year, Sweden's GDP rose by 0.1 percent after a contraction of 0.1 percent in the second quarter for annual growth of 0.3 percent, down from 0.6 percent annual growth in the second quarter.
   In 2014 Sweden's economy is forecast to expand by 2.5 percent, slightly down from 2.6 previously forecast, and the accelerate by 3.7 percent in 2015, up from 3.5 percent and 2.8 percent in 2016.
    "The recovery abroad is important to the Swedish economy, which after almost a year of weak growth in now moving towards better times," the bank said, adding that the labour market has improved along with the confidence of Swedish households and corporate sectors.
    In contrast to policy decisions in recent months, the Riksbank's board was unanimous in its decision to cut the repo rate.


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