The Riksbank, which has now cut its rate by 35 basis points this year, said inflation was rising and economic activity improving but the krona's exchange rate had risen and it was difficult to assess the consequences of the situation in Greece so its policy had to become even more expansionary to ensure that inflation continues to rise towards the bank's 2.0 percent target.
"The consequences of the situation in Greece for the euro area as a whole and for Sweden are difficult to judge," the Riksbank said, adding:
"Monetary policy now needs to be very expansionary so that inflation rises towards the target and to reduce the risks association with a situation in which inflation is too low."
The Riksbank first began purchasing Swedish government bonds in February and raised the amount it would buy in March and April. Purchases of 40-50 billion crowns decided in April will have been concluded in September at which point the new purchase of 45 billion will start and run until the end of this year.
By the end of 2015 the Riksbank will have purchased government bonds totaling 135 billion, around 20 percent of the outstanding stock of government bonds and around 4 percent of Gross Domestic Product. In comparison, the European Central Bank's (ECB) plan for bond purchases amounts to 7 percent of the euro area's stock and 4 percent of GDP.
The projected path for the repo rate was also lowered, with the rate in 2015 seen averaging minus 0.3 percent, down from April's forecast of minus 0.2 percent as the forecast for consumer price inflation was trimmed to an average of 0.2 percent from the previous forecast of 0.3 percent.
The possibility of a further cuts in the repo rate was also forecast, with the repo rate seen at minus 0.37 percent in the third quarter of 2015 and minus 0.41 percent in the fourth quarter, below the previous forecasts of minus 0.28 and minus 0.29 percent, respectively.
For 2016 the repo rate is seen averaging minus 0.3 percent, down from the previous forecast of minus 0.2 percent, with a forecast of minus 0.33 percent in the third quarter, down from April's forecast of minus 0.21 percent. The Riksbank expects to slowly raise the repo rate at the end of 2016 when inflation is expected to average 2.0 percent.
Sweden's inflation rate rose to 0.1 percent in May from minus 0.2 percent in April while the crown's exchange rate has appreciated since mid-April, reversing a slide since March 2014.
The crown fell in response to the Riksbank's rate cut today, trading at 8.44 to the U.S. dollar from 8.37 prior to the news, to be down 7.6 percent this year.
Sveriges Riksbank issued the following statement (tables not included):
(Click here to read the Riksbank's July monetary policy report.)
"Inflation is rising and economic activity in Sweden is continuing to strengthen. But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation. In this uncertain environment, monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points to -0.35 per cent and to extend the purchases of government bonds by a further SEK 45 billion with effect from September and until the end of the year.
Monetary policy is having an effect – inflation is rising
The Riksbank's expansionary monetary policy is having an effect and inflation is rising. In May, CPIF inflation was 1.0 per cent. Prices of goods and food are increasing in line with historical averages, while the rate of price increase on services is rising from a low level. At the same time as inflation is rising, economic activity is continuing to strengthen and the situation on the labour market is gradually improving. CPIF inflation is expected to be close to 2 per cent from the end of 2015.
An uncertain world
International growth is also rising. In the euro area, economic activity is strengthening, but the events in Greece over the past few days have substantially increased the uncertainty. The consequences of the situation in Greece for the euro area as a whole and for Sweden are difficult to judge.
Since the Riksbank's most recent decision in April, the krona has strengthened more than expected against several currencies. If the exchange rate were to be too strong in relation to the Riksbank's forecast, prices of imported goods would increase more slowly and demand in the Swedish economy would fall. Such a development would risk breaking the upturn in inflation that has now begun.
Measures to support the upturn in inflation
In this uncertain environment, monetary policy needs to give more support to ensure that inflation continues to rise towards the target of 2 per cent. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points to ‑0.35 per cent and to extend the purchases of government bonds by a further SEK 45 billion until the end of the year. The purchases decided upon in April are expected to be concluded in September, at which point the new purchases will be initiated. The repo rate is expected to be around -0.35 per cent for just over a year. The repo-rate path reflects the fact that it is possible to cut the repo rate further. The expansionary monetary policy underlines the Riksbank's aim to safeguard the role of the inflation target as nominal anchor for price-setting and wage-formation.
Readiness to do more
The Riksbank still has a high level of preparedness to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings. The repo rate can be cut further and the government bond purchases can be extended. The Riksbank is also prepared to intervene on the foreign exchange market if the upturn in inflation is threatened as the result of, for instance, a very problematic development in the markets. The purchase of other types of securities and the launch of a company lending programme via the banks may also come into question.
Risks associated with household indebtedness must be managed
Monetary policy now needs to be very expansionary so that inflation rises towards the target and to reduce the risks associated with a situation in which inflation is too low. At the same time, however, the low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. As current debt levels already entail significant risks for the Swedish economy, it is essential that the government and other authorities implement measures that will reduce them. Rapid price increases for high-risk financial assets also require increased vigilance in the period ahead.
Deputy Governor Henry Ohlsson entered a reservation against the decision to cut the repo rate. He considered that the repo rate and the repo-rate path should be held unchanged. Mr Ohlsson thought it was sufficient to extend and prolong the purchases of government bonds in the current economic situation.
The decision on the repo rate will apply with effect from 8 July. The minutes from the Executive Board's monetary policy discussion will be published on 15 July. Further information on the Riksbank's purchases of government bonds can be found in a separate basis for the decision on the Riksbank's website, www.riksbank.se. A press conference with Governor Stefan Ingves and Marianne Nessén, Head of the Monetary Policy Department, will be held today at 11 a.m. in the Riksbank. Press cards must be shown. The press conference will be broadcast live on the Riksbank's website where it will also be available to view afterwards."