Sveriges Riksbank, which has kept its rate steady since February 2016, said the economy had developed largely as it forecast in September, and while inflationary pressures are still moderate there are signs of rising inflationary pressures and conditions are good for inflation to remain close to its 2.0 percent target in coming years.
In its latest monetary policy report, the Riksbank maintained its forecast for the repo rate to rise to an average minus 0.10 percent during 2019 - implying two rate hikes - from minus 0.50 percent this year and then rise further to a positive 0.4 percent in 2020 and 2.0 percent in 2021.
"All in all, the assessment of the Executive Board is that monetary policy needs to proceed cautiously and be expansionary for a long period of time to come," the Riksbank said.
The Riksbank, which like the U.S. Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank used asset purchases as a monetary tool in recent years, also said it would continue to reinvest coupon payments from its bond portfolio until further notice.
The Riksbank's forecast for inflation with a fixed interest rate was unchanged in its latest policy report while the forecast for economic growth was lowered.
Inflation is seen averaging an unchanged 2.2 percent this year, then 2.1 percent in 2019, 1.9 percent in 2020 and 2.0 percent in 2021. Core inflation rose to 2.5 percent in September from 2.2 percent in previous three months, boosted by higher energy prices.
Gross domestic product is seen averaging 2.3 percent this year, down from September's forecast of 2.9 percent and then 1.9 percent in 2019, down from 2.0 percent. In 2020 the economy is seen growing by 2.0 percent, down from 2.1 percent forecast in September and then 1.8 percent in 2021.
The downward revision in growth was mainly due to an downward adjustment of national accounts from 2016 to reflect higher imports and lower investments that previously published.
"The Riksbank still, with the aid of a number of indicators, makes the assessment that economic activity in Sweden is and has been strong in recent years," the monetary policy report said.
In the second quarter of this year Sweden's GDP grew 2.5 percent year-on-year, down from 2.8 percent in the previous quarter, with only marginal effects seen from global trade disputes.
As in the past, the Riksbank pointed to the need for the krona's exchange rate to develop in a way that helps keep inflation up, signaling that it is quite comfortable with the current krona weakness.
Against the U.S. dollar, the krona has weakened this year and was trading at 9.09 today, down 10 percent this year. Against the euro, the krona has depreciated 5.2 percent this year and was trading at 10.36 today.
As in September and July two of the Riksbank's six board members - Henry Ohlsson and Martin Floden - entered reservations against the policy decision, with both calling for a 25-point rate hike today.
Although inflation is now above the Riksbank's target, it is clearly being very cautious in tightening its policy.
The Riksbank's last rate hike was in July 2011 following a tightening campaign from July 2010 in which the repo rate was raised 175 basis points to 2.0 percent.
But the rate hikes came against a backdrop of a flaring up of the sovereign debt crises in the euro zone that engulfed Greece, Ireland, Cyprus, Italy, Portugal and Spain.
By December 2011 the Riksbank acknowledged that fiscal tightening in the euro area was hitting Swedish exports and changed course. The Riksbank's move largely mirrored that of the European Central Bank, which started its easing cycle in November 2011 after a brief 7-month tightening cycle.
The Riksbank's tightening cycle in 2010/11 was met by much criticism, including economist Paul Krugman who borrowed a phrase and described the rate hikes as "sadomonetarism in action."
The Riksbank's easing cycle not only involved cutting the key rate by a total of 2.50 percentage points to a negative 0.50 percent by February 2016 but also included bond purchases to hold down long-term interest rates. Its bond holdings amount to about 330 billion krona.
Flooding the banking system with liquidity by buying government bonds was first pioneered by the Bank of Japan in 2001 but then became a mainstay of major central banks.
Sveriges Riksbank issued the following press release: (Tables excluded)
"Economic activity in Sweden is strong and inflation is at the target of 2 per cent. Since the monetary policy decision in September, developments have for the most part been as expected and the forecasts remain largely unchanged. Consequently, in line with the previous forecast, the Executive Board has decided to hold the repo rate unchanged at -0.50 per cent. If the economy develops in a way that continues to support the prospects for inflation, the Executive Board assesses that it will soon be appropriate to start raising the repo rate at a slow pace. The forecast for the repo rate is the same as in September and indicates that the repo rate will be raised by 0.25 percentage points either in December or February.
Favourable economic activity, Swedish inflation on target
Global economic developments continue to be positive and in line with the Riksbank’s forecasts, even though, for example, developments in Italy and the escalated trade conflict between the United States and China mean that uncertainty over the prospects for the global economy has increased. In the wake of the stronger economic activity, inflationary pressures are expected to continue rising and monetary policy abroad to move in a less expansionary direction.
In Sweden, too, economic developments have been largely as expected and economic activity has been good for a long period of time. The labour market situation is expected to remain strong, even if GDP growth slows down going forward. Inflation increased to 2.5 per cent in September, partly as a result of rapidly rising energy prices. Different measures of underlying inflation are lower and inflationary pressures are still assessed to be moderate. However, there are signs that inflationary pressures are rising and the conditions are good for inflation to remain close to the target of 2 per cent in the coming years.
If inflation prospects hold up, it will soon be appropriate to start raising the repo rate
The overall picture of the economic outlook and inflation prospects remains largely unchanged since the September Monetary Policy Report. Consequently, in line with the previous forecast, the Executive Board has decided to hold the repo rate unchanged at -0.50 per cent. If the economy develops in a way that continues to support the prospects for inflation, the Executive Board assesses that it will soon be appropriate to start raising the repo rate at a slow pace. The forecast for the repo rate is unchanged since the monetary policy meeting in September and indicates that the repo rate will be raised by 0.25 percentage points either in December or February. Reinvestments of principal payments and coupon payments in the government bond portfolio will continue until further notice.
Favourable economic activity, Swedish inflation on target
Global economic developments continue to be positive and in line with the Riksbank’s forecasts, even though, for example, developments in Italy and the escalated trade conflict between the United States and China mean that uncertainty over the prospects for the global economy has increased. In the wake of the stronger economic activity, inflationary pressures are expected to continue rising and monetary policy abroad to move in a less expansionary direction.
In Sweden, too, economic developments have been largely as expected and economic activity has been good for a long period of time. The labour market situation is expected to remain strong, even if GDP growth slows down going forward. Inflation increased to 2.5 per cent in September, partly as a result of rapidly rising energy prices. Different measures of underlying inflation are lower and inflationary pressures are still assessed to be moderate. However, there are signs that inflationary pressures are rising and the conditions are good for inflation to remain close to the target of 2 per cent in the coming years.
If inflation prospects hold up, it will soon be appropriate to start raising the repo rate
The overall picture of the economic outlook and inflation prospects remains largely unchanged since the September Monetary Policy Report. Consequently, in line with the previous forecast, the Executive Board has decided to hold the repo rate unchanged at -0.50 per cent. If the economy develops in a way that continues to support the prospects for inflation, the Executive Board assesses that it will soon be appropriate to start raising the repo rate at a slow pace. The forecast for the repo rate is unchanged since the monetary policy meeting in September and indicates that the repo rate will be raised by 0.25 percentage points either in December or February. Reinvestments of principal payments and coupon payments in the government bond portfolio will continue until further notice.
Monetary policy needs to proceed cautiously
The Riksbank continues to exercise vigilance as regards the development of inflationary pressures in the economy. In this context, it is also important that the krona exchange rate develops in a manner compatible with inflation remaining close to target. All in all, the assessment of the Executive Board is that monetary policy needs to proceed cautiously and be expansionary for a long period of time to come.
Measures needed to reduce the risks associated with household indebtedness
The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. It is essential, to ensure that the development of the Swedish economy is sustainable in the long term, that measures are taken in housing policy and taxation policy and that macroprudential policy is designed appropriately.
The Riksbank continues to exercise vigilance as regards the development of inflationary pressures in the economy. In this context, it is also important that the krona exchange rate develops in a manner compatible with inflation remaining close to target. All in all, the assessment of the Executive Board is that monetary policy needs to proceed cautiously and be expansionary for a long period of time to come.
Measures needed to reduce the risks associated with household indebtedness
The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. It is essential, to ensure that the development of the Swedish economy is sustainable in the long term, that measures are taken in housing policy and taxation policy and that macroprudential policy is designed appropriately.
Deputy Governors Martin Flodén and Henry Ohlsson entered reservations against the decision to hold the repo rate unchanged and advocated raising the repo rate to -0.25 per cent. Mr Flodén referred to the upturn in inflation and the strengthened confidence in the inflation target and advocated a repo-rate path that coincides with the path in the report with effect from the third quarter of 2019. Mr Ohlsson referred to the strong economic outcome in Sweden and abroad and advocated bringing forward the repo-rate path with the same gradient as the repo-rate path in the Monetary Policy Report."
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