Thursday, September 4, 2014

Sweden holds rate steady, sees first rate rise end-2015

    Sweden's central bank maintained its benchmark repo rate at 0.25 percent and repeated its guidance from July that "it is assessed to be appropriate to begin raising the repo rate towards the end of 2015, when inflation is clearly higher."
    The Riksbank, which slashed its key rate by a larger-than-expected 50 basis points in July in an attempt to boost inflation, said inflation still remains low but had been a little higher than expected and the near-term forecast for inflation had been revised upwards slightly due to the weaker exchange rate of the Swedish krona currency and somewhat higher labour costs.
    The Riksbank, which has been heavily criticized for keeping rates too high despite missing its inflation target for 2-1/2 years, revised up its forecast for headline inflation this year to average zero percent from its July forecast of minus 0.1 percent, but maintained the 2015 inflation forecast at 1.3 percent and trimmed the 2016 forecast to 2.9 percent from a previous 3.0 percent.
   The central bank's forecast for CPIF inflation, which is based on a fixed mortgage rate, was unchanged at 0.6 percent for 2014, but revised up to 1.7 percent in 2015 from 1.6 percent and unchanged at 2.0 percent in 2016.
    The Riksbank targets inflation at 2.0 percent and since the start of 2012, inflation has been below that rate. In 2012 inflation averaged 0.9 percent and zero in 2013.

    In July inflation was zero percent, down from 0.2 percent in June.
    The Riksbank forecast for its repo rate was marginally reduced, mainly due to weak growth in Europe that reduces demand for Swedish exports.
     This year the repo rate is forecast to average an unchanged 0.5 percent and then decline to 0.3 percent in 2015 and average 1.2 percent in 2016, down from a previous forecast of 1.3 percent.
    Looking at the quarterly averages of the repo rate, the Riksbank forecast 1.38 percent in the third quarter of 2016, down from its previous forecast of 1.45 percent, and 2.25 percent by the third quarter of 2017, down from 2.35 forecast in July.
    "From an historical perspective, this is an unusually low repo rate in a stage where economic activity is relatively good and CPIF inflation is close to 2 percent," the Riksbank said.
    Improvements in Sweden's economy are being hampered by weak demand from Europe along with the impact of the conflict in Ukraine, and the Riksbank cut its forecast for Gross Domestic Product growth this year to 1.7 percent from a previous forecast of 2.2 percent and the 2015 forecast to 3.0 percent from 3.3 percent. The 2016 forecast was unchanged at 3.1 percent.
    In the second quarter of this year, Sweden's economy expanded by only 0.2 percent from the first quarter for annual growth of 1.9 percent, the same rate as in the first quarter.
    But the Riksbank still sees consumption and housing investment increasing at a good pace, with the labour market developing better than expected during the summer. The forecast for 2014 unemployment was trimmed to 7.9 percent from a previous 8.0 percent but maintained at 7.3 percent for 2015 and 6.7 percent for 2016.
    As before, the Riksbank - which no longer has primary responsibility for financial stability - pointed to the risks from the high level of household debt and called for further measures that are directly aimed at reducing household demand for credit.
    In coming years, the Riksbank expects household debt to rise faster than income, with household debt as a share of disposable income amounting to around 185 percent.



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