Wednesday, April 9, 2014

Sweden holds rate, greater chance of near-term rate cut

    Sweden's central bank maintained its benchmark repo rate at 0.75 percent, as expected, but said monetary policy had to remain expansionary to boost inflation and the future path of the repo rate had "been adjusted down somewhat and reflects a greater probability of a repo-rate cut in the near term compared with the assessment made in February."
    However, the Riksbank added that the repo rate was still expected to remain at its current level for around a year before it should be raised in response to higher inflation.
    In December last year the Riksbank cut its repo rate by 25 basis points and pushed back the time frame for any rate rise until early 2015 from late 2014 and in February it confirmed this guidance while it trimmed its 2014 growth forecast.
    The Riksbank has now revised upwards its 2014 growth forecast but revised down its 2015 forecast. The inflation forecast for this year and 2015 has been revised down.
    "As economic activity strengthens, inflationary pressures are expected to rise," the bank said, adding it was uncertain how quickly inflation will rise, particularly because it has been weaker than expected.

    Sweden's inflation rate was minus 0.2 percent in both February and January as consumer prices remain under pressure following 2013's average inflation rate of zero, down from 2012's 0.9 percent.
    "Price increases have been low for some time relative to developments in the companies' cost," the Riksbank said, adding that companies should be able to raise their prices as the economy strengthens.
    The 2014 forecast for headline inflation was revised down to 0.2 percent from the previous forecast of 0.6 percent and the 2015 forecast revised down to 2.2 percent from 2.5 percent. Inflation in 2016 is forecast at 3.2 percent, up from February's forecast of 3.0 percent.
    The Riksbank targets inflation of 2.0 percent.
    Sweden's inflation rate was minus 0.2 percent in both February and January as consumer prices remain under pressure following 2013's average inflation rate of zero, down from 2012's 0.9 percent.
    This week the International Monetary Fund forecast inflation of 0.4 percent in 2014 but then 1.6 percent in 2015 and 2.0 percent in 2016.
    The forecast for the repo rate was unchanged at 0.7 percent this year but then cut to 1.1 percent in 2015 from February's forecast of 1.4 percent and the 2016 forecast was trimmed to 2.3 percent from 2.4 percent.
    Sweden's economy picked up speed toward the end of last year with a broad rise in demand, implying that an economic upturn had begun.
    Sweden's Gross Domestic Product expanded by 1.7 percent in the fourth quarter from the third quarter for annual growth of 3.1 percent, a sharp rise from 0.6 percent annual growth in the preceding two quarters and 2013's average growth of 1.5 percent.
   The Riksbank forecast that GDP would expand by 2.7 percent this year, up from February's forecast of 2.4 percent while 2015 GDP is forecast to expand by 3.2 percent, up from 3.6 percent. The forecast for 2016 GDP was maintained at 2.8 percent.
    The IMF this week forecast 2014 growth of 2.8 percent and 2.6 percent for 2015.
    "The prospects for the Swedish economy remain bright," the bank said, with export orders rising and  optimism among households is relatively optimistic. The labour market is also expected to improve significantly in the second half of this year.
    It added that economic developments outside Sweden had continued to improve and at this point any contagion effects from developments in Ukraine were expected to be limited and not prevent a recovery of the global economy.
    However, the Riksbank cautioned that household debt as a share of income was expected to rise somewhat more than expected in February.
    Two members of the Riksbank's executive board had entered reservations about the decision to hold the repo rate steady today.
    Deputy Governor Karolina Ekholm and Martin Floden had recommended lowering the repo rate to 0.5 percent and then keeping the rate path at this level for about a year.



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