Thursday, September 7, 2017

Sweden holds policy, raises growth, inflation forecasts

      Sweden's central bank kept its monetary policy stance unchanged along with its forecast for first raising the benchmark rate by mid-2018 despite a sharp hike in growth and inflation projections.
      Sveriges Riksbank, which has maintained its benchmark repo rate at minus 0.50 percent since last cutting it in February 2016, confirmed its decision from April that it would continue to purchase government bonds during the second half of this year, pushing the total amount bought to 290 billion Swedish krona, excluding reinvestments.
      Although Riksbank Governor Stefan Ingves said economic activity is "strong and inflation is close to the target of 2 percent," he added cost pressures in the economy remain weak and it is important for inflation that the exchange rate of the krona doesn't appreciate too quickly, which could happen if the Riksbank's monetary policy deviated too far from other countries.
      As in recent years, Ingves said the Riksbank was still prepared to ease its monetary policy further to stabilize inflation and needs to be expansionary to safeguard the role of the inflation target.
      At the same time Ingves acknowledged low interest rates contribute to raising the risk from high household debt, adding this risk needs to be managed via housing, taxation and macro prudential policy.
       The Riksbank raised its forecast for economic growth this year to 3.2 percent, the same rate as seen in 2016, from July's forecast of 2.2 percent.
       In the second quarter of this year Sweden's Gross Domestic Product surged by a higher-than-expected annual rate of 4.0 percent, up from 2.3 percent in the first quarter.
      For 2018 Sweden's GDP is seen growing by 2.7 percent, up from 2.4 percent, and in 2019 by 2.0 percent, down from 2.1 percent.
       The forecast for the repo rate was unchanged, with the first hike seen by the third quarter of next year to minus 0.40 percent, then to a positive 0.11 percent in the third quarter of 2019 and 0.62 percent by the third quarter of 2020.
       The forecast for headline consumer price inflation this year was raised to 1.8 percent from a previous 1.6 percent and compared with 1.0 percent in 2016. In July inflation rose to 2.2 percent from  1.7 percent.
       For 2018 inflation is seen averaging 2.1 percent, up from July's forecast of 2.0 percent, and then averaging 2.9 percent in 2019.
      As flagged by the Riksbank in recent months, the bank's board officially adopted inflation as measured in terms of consumer prices with a fixed interest rate, or CPIF, as its formal target in contrast to the headline consumer price index, or CPI.
       The change should not affect the conduct of monetary policy as the Riksbank has been using CPIF as its operational target for years, Ingves said.
       The drawback of using CPI as a measure of inflation for monetary policy purposes is that any change to the bank's interest rate directly affects the CPI through mortgage rates but this has nothing to do with the underlying inflationary pressures.
       As part of the new target, the board also decided to use a variation band of 1 - 3 percent around CPIF to "illustrate that monetary policy is not able steer inflation in details, but that inflation normally varies around the target," which remains 2.0 percent.
       Ingves said the variation band illustrates in a simple way that inflation varies and will not be exactly 2 percent every single month, but added that the target remains 2 percent and the band was therefore not a so-called target range, which is used by some other central banks.
      The Swedish krona has been weak against the euro since 2012, helping its export industry. But since late 2016 it has slowly been firming and was trading at 9.53 to the euro today, up 0.5 percent this year.

     Sveriges Riksbank issued the following two statements:

"Economic activity is strong and inflation is close to the target of 2 per cent. Monetary policy needs to remain expansionary for inflation to continue to be close to 2 per cent. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at −0.50 per cent and is expecting, as before, not to raise it until the middle of 2018. The purchases of government bonds will continue during the second half of 2017, as decided by the Executive Board in April. 
The economic signals from abroad are good, but global inflation remains subdued. Compared with the forecast in July, there are now expectations of a somewhat more expansionary monetary policy in many countries that are important to Sweden.

Economic activity in Sweden is strong; GDP grew rapidly in the second quarter and the employment rate is at a historically high level. Inflation has continued to rise and in recent months been higher than expected. The outcomes are partly explained by temporary factors, but even disregarding this, inflation has been stronger than expected.

However, it has taken time and a great deal of support from monetary policy to bring up inflation and inflation expectations. Although there has been a broader increase in prices for services recently, economic activity needs to continue to make an impact on price development. This is underlined by, for instance, weak growth in cost pressures so far this year. It is also important for the development of inflation that the krona exchange rate does not appreciate too quickly. This could happen if, for example, the Riksbank's monetary policy deviates too far from that of other countries.

Continued expansionary monetary policy for inflation close to the target

Given this, the Executive Board of the Riksbank has decided to hold the repo rate unchanged at -0.50 per cent and does not expect to raise it until the middle of 2018. Purchases of government bonds will continue during the second half of 2017, as decided in April. At the end of the year, the purchases of government bonds will thus amount to a total of SEK 290 billion, excluding reinvestments. Maturities and coupon payments will be reinvested until further notice. CPIF inflation is expected to be close to 2 per cent in the coming years, with continued support from monetary policy.

Just as before, the Executive Board is prepared to implement further monetary policy easing if necessary to stabilise inflation and safeguard the inflation target. All of the tools that the Riksbank has described earlier can, as always, be used if necessary.

Monetary policy needs to be expansionary to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation. But the low interest rates at the same time contribute to increasing the risks linked to high and rising household indebtedness. To achieve long-term sustainable development in the Swedish economy, these risks need to be managed via targeted measures within housing policy, taxation policy and macroprudential policy.

CPI1.01.8 (1.6)2.1 (2.0)2.9 (2.9)
CPIF1.42.0 (1.8)1.9 (1.7)2.1 (2.0)
GDP3.23.2 (2.2)2.7 (2.4)2.0 (2.1)
ages 15-74, per cent
6.96.7 (6.7) 6.5 (6.6)6.5 (6.7)
Repo rate, per cent-0.5-0.5 (-0.5)-0.4 (-0.4)0.0 (0.0)
*Annual percentage change, annual average

Note. The assessment in the Monetary Policy Report in July 2017 is shown in brackets.
Sources: Statistics Sweden and the Riksbank

2017 Q22017 Q32017 Q42018 Q32019 Q32020 Q3
Repo rate-0.50-0.50 (-0.50)-0.50 (-0.50)-0.40 (-0.40) 0.11 (0.11)0.62 
*Per cent, quarterly averages

Note. The assessment in the Monetary Policy Report in July 2017 is shown in brackets.
Source: The Riksbank

The decision on the repo rate will apply with effect from 13 September. The minutes from the Executive Board's monetary policy meeting will be published on 21 September. A press conference with Governor Stefan Ingves and Anders Vredin, acting Head of the Monetary Policy Department, will be held today at 11 a.m. in the Riksbank. Please note that entrance is through the bank's personnel entrance at Malmskillnadsgatan 7, and that it may take longer than normal to enter the bank. Press cards must be shown. The press conference will be webcast live at"

     Sveriges Riksbank also published the following statement regarding its new inflation target:

"The Executive Board of the Riksbank has decided to adopt inflation measured in terms of the CPIF (the consumer price index with a fixed interest rate) as a formal target variable for monetary policy. The target for monetary policy is that the annual change in the CPIF shall be 2 per cent, that is, the same level previously applied to the CPI. The Riksbank will also use a variation band of 1-3 per cent for outcomes for CPIF inflation to illustrate that monetary policy is not able to steer inflation in detail, but that inflation normally varies around the target.
"These changes will not affect the monetary policy conducted. In practice, the CPIF has been the Riksbank's operational target variable for several years. Formally adopting the CPIF as target variable only confirms this practice," says Governor of the Riksbank, Stefan Ingves.

The CPI has characteristics that could sometimes make it problematic to use as guidance for monetary policy. One reason is that repo-rate adjustments, through their effect on households' mortgage rates, have large and direct effects on the CPI which are not connected to underlying inflationary pressures.

The variation band is intended to illustrate, in a simple way, that inflation varies and will not be exactly 2 per cent every single month. The target for monetary policy is, however, still 2 per cent. Consequently, this is not a so-called target range.

"2 per cent still applies. The Riksbank will always aim for this, regardless of whether inflation is inside or outside the variation band to start with," says Governor Stefan Ingves.

These decisions will apply with effect from the monetary policy decision on 6 September 2017. For more information on the background and deliberations behind the decisions, see the enclosed annex to the minutes."


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