Thursday, February 13, 2014

Sweden maintains rate, 2014 prospects still "good"

    Sweden's central bank maintained its benchmark repo rate at 0.75 percent, as expected, and confirmed that it does not expect to raise the rate until the beginning of 2015 with the outlook for the economy and inflation in line with the bank's forecast from December.
    The Riksbank, which cut its rate by 25 basis points in December 2013 and pushed back the time frame for any rate rise until early next year from late this year, also said the "recent financial market turbulence has had limited contagion effects and is not expected to prevent a recovery in the global economy," with growth in the United States remaining high and the euro area recovering, albeit slowly.
    The Riksbank described the prospects for the Swedish economy as "good," with the labour market improving and confidence among households and companies rising to levels that are better than normal.
    Despite the improving economy, inflation is expected to remain low in the coming year, which means that the repo rate "needs to remain at a low level until inflation picks up and the recovery is on firmer ground," the Riksbank said, adding that "slow increases in the repo rate will not begin until the start of 2015."
    Sweden's headline inflation rate was steady at 0.1 percent in December and November, and the Riksbank maintained its forecast for consumer price inflation to only rise by 0.6 percent this year, after zero growth in 2013, and then by 2.5 percent in 2015 and 3.0 percent in 2016.
    The central bank targets inflation of 2.0 percent.
    The forecast for economic growth this year was revised slightly down to 0.9 percent from the December forecast of 1.0 percent, while the forecast for 2015 was unchanged at 1.8 percent and 2016 at 2.0 percent. In 2013 Sweden's Gross Domestic Product was estimated to have expanded by 0.9 percent. The latest data show that GDP in the third quarter expanded by 0.1 percent from the second quarter for annual growth of 0.3 percent.
    Earlier this month the Riksbank said its survey of Swedish companies showed they first expected to be able to raise prices in a year due to improving demand but those price rises were still mainly minor.
    Sweden's monetary policy has for some time tried to balance the need for a low repo rate to push inflation back up toward the central bank's target against the risks that households continue to accumulate more debt and are thus vulnerable to economic shocks and could face repayment troubles when rates start to rise.
    The Riksbank said these risks had not changed much in recent months and high household debt - projected to reach 178 percent of disposable income by 2016 - still entails a risk, but several policy areas need to cooperate to manage these risks. The central bank was apparently referring to last year's creation of the Financial Supervisory Authority (FSA), which has tightened some of the rules for borrowers and lenders.



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