Wednesday, February 13, 2019

Sweden maintains rate, still sees next hike in H2

     Sweden's central bank left its benchmark repo rate steady at minus 0.25 percent, as expected, and confirmed it still expects to raise its rate in the second half of this year to keep inflation around its target despite uncertainty over the strength of the global economy and a dampening of sentiment in Swedish households and business.
     Sveriges Riksbank, which in December 2018 raised its repo rate for the first time since July 2011, maintained its forecast to raise the repo rate about twice a year, each time by 25 basis points, through 2021 when it reaches 0.8 percent on average from 0.3 percent in 2020.
     But the Riksbank also said monetary policy continues to be expansionary to support economic activity, underlining the need to "proceed with caution" and adding "it is the economic outlook and inflation prospects that will determine future monetary policy."
     The Risksbank maintained its forecast for inflation to remain stable around its 2.0 percent target in coming years, but lowered its growth forecast for this year to 1.3 percent from December's forecast of 1.5 percent and the 2020 forecast to 1.9 percent from 2.0 percent.
     The 2021 growth forecast was kept unchanged at 1.8 percent.
      "Growth abroad has slowed down, but economic activity will continue to be good over the next few years, with low unemployment and rising wage growth in many countries," the Riksbank said, adding Sweden's labour market has been slightly stronger than expected, unemployment is at its lowest in a decade and inflation and inflation expectations are now established around 2 percent.
     The rate hike in December was the Riksbank's first change in its policy rate since February 2016 when it wrapped up an easing cycle that saw rates steadily drop from 2.0 percent in December 2011 in the wake of Europe's sovereign debt crises.
     In addition to the rate cuts, the Riksbank also embarked on bond purchases, known as quantitative easing, in February 2015 but took the first small step toward normalizing its monetary policy in December 2017 by letting the asset purchase program expire.
      The Riksbank confirmed that it will continue to reinvest payments and coupons from its portfolio of government bonds until further notice.
     At the end of January the Riksbank's bond holdings amounted to close to 355 billion Swedish krona, up from 290 billion in December 2017, based an earlier decision that large principal payments in the first half of 2019 will be distributed evenly across the period from January 2018 to June 2019 so the bond portfolio will continue to rise until March this year when a large principal payment is due that will then reduce its holdings.
     At its next meeting in April, the bank's executive board will decide how to manage future principal payment.
     The Riksbank also said its board had decided not to extend its mandate, which expired on Jan. 12,  that allows its to rapidly intervene in the foreign exchange market.
     The board's mandate was originally adopted in January 2016, when inflation and inflation expectations were far below 2 percent and a rapid rise in the krona's exchange rate was seen as "an acute threat" to keeping confidence in the inflation target.
     Sweden's headline inflation rate was steady at 2.0 percent in December and November while economic growth in the third quarter, as expected, cooled to annual growth of 1.6 percent in the third quarter of last year from 2.7 percent in the second quarter.
     The krona, which has declined steadily against the U.S. dollar since February 2018, has firmed this month but was still trading at 9.21 to the dollar today, down 2.5 percent this year.


     Sveriges Riksbank issued the following statement (excluding tables):

"Repo rate unchanged at 0.25 per cent
Economic developments in Sweden and abroad have entered a phase of lower growth. Although growth is more subdued, economic activity is still strong. The conditions for inflation to remain close to 2 per cent in the coming years have not changed to any great extent. The Executive Board has therefore decided to hold the repo rate unchanged at 0.25 per cent. As in December, the forecast for the repo rate indicates that the next increase will be during the second half of 2019, provided that the economic outlook and inflation prospects are as expected.

Good economic activity despite mixed signals
Growth abroad has slowed down, but economic activity will continue to be good over the next few years, with low unemployment and rising wage growth in many countries. There is still substantial uncertainty about the strength of the international economy.
Although indicators point to sentiment in the household and corporate sectors having dampened in Sweden, the picture of strong economic activity remains. Developments on the labour market have been slightly stronger than expected and unemployment is at its lowest level in a decade. Both inflation and inflation expectations have become established at around 2 per cent.

Good conditions for inflation close to 2 per cent going forward
The strong economic activity and rising cost pressures both in Sweden and abroad mean that the conditions are good for inflation to remain close to the target in the coming years. This outlook has not changed to any great extent since December. The Executive Board has therefore decided to hold the repo rate unchanged at -0.25 per cent. Monetary policy thus continues to be expansionary and provide support to economic activity.
Reinvestments of principal payments and coupons in the government bond portfolio will continue until further notice.

Monetary policy needs to proceed cautiously
Several factors indicate that monetary policy needs to proceed with caution. As in December, the forecast for the repo rate indicates that the next increase will be during the second half of 2019, on condition that the economic outlook and inflation prospects are as expected. The Executive Board assesses that the repo rate needs to be raised at a slow pace even after that, roughly twice a year by 0.25 percentage points on each occasion, for inflation to remain close to 2 per cent. However, there is uncertainty over developments abroad and the strength of domestic demand. It is the economic outlook and inflation prospects that will determine future monetary policy.
In January 2016, the Executive Board adopted a mandate that facilitates rapid intervention on the foreign exchange market. The mandate has been extended several times since then, but the Executive Board chose not to extend it further when it expired on 12 February.

Important to have measures to reduce the risks associated with household indebtedness
Swedish households are highly indebted and therefore sensitive to changes in economic conditions, such as rising interest rates or higher unemployment. Reducing the risks linked to household indebtedness and addressing the structural problems on the Swedish housing market requires measures within housing and tax policy and an appropriate macroprudential policy."

     www.CentralBankNews.info




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