Thursday, October 25, 2012

Sweden holds rate but likely to cut, rate path revised down

    Sweden's central bank held its benchmark repurchase rate unchanged at 1.25 percent, but the Riksbank said it was more likely to cut than raise its rate in coming months to stimulate economic growth and push the inflation rate higher towards the bank's target of 2 percent.
    The Riksbank, which has cut its rate twice this year for a total cut of 50 basis points, revised downwards its forecast for the future path of the repo rate, saying it expects an average rate of 1.2 percent in 2013, down from September's forecast of 1.4 percent, and an average rate of 1.7 percent in 2014, down from 2.0 percent. For 2015 the Riksbank forecast an average rate of 2.3 percent.
    "It is now more probable that the repo rate will be cut than raised during the winter," the Riksbank said in a statement following a meeting of its executive board.
    The low repo rate path is expected to be accompanied by a stabilisation of households' debt ratios at current levels, it added.
    The downward risks to the forecast are a worsening of the euro area's problems, which would lead to an even lower repo rate, while higher-than-expected demand by Swedish households and companies than expected would justify a higher rate path, the Riksbank said.
    Two of the Riksbank's six board members dissented from the decision to keep the rate unchanged, with Deputy Governor Karolina Ekholm advocating a cut to 1.0 percent and Deputy Governor Lars Svensson wanting the repo rate cut to 0.75 percent.

    The Riksbank said Sweden's unemployment rate, which is expected to average 7.7 percent this year from 2011s 7.5 percent, is expected to rise to 7.9 percent in 2013 and then ease to 7.4 percent in 2014.
    With no upward pressure on inflation, the Riksbank forecast that consumer prices would average an increase of 0.9 percent in 2012, down from its previous forecast of 1.3 percent, and the inflation rate would then rise to an average 2.4 percent in 2014,  below its September forecast of 2.6 percent.
    In September Sweden's annual inflation rate fell to 0.4 percent from 0.7 percent. In 2011 consumer prices rose by 3.0 percent.
    Sweden's economy has shown resilience to Europe's debt crises, helped by the high purchasing power of Swedish households. But uncertainty surrounding the euro area's fundamental problems, Sweden's main trading partner, remains high and the area's economic growth is expected to remain weak, the bank said.
    Sweden's second quarter Gross Domestic Product grew by 1.3 percent, down from 1.5 percent in the first quarter.
    In contrast to Europe, the Riksbank was relatively upbeat about global growth.
    "Although there is a slowdown in many emerging economies, the global economy was still growing at a relatively good pace," the bank said.
    Last month the Riksbank surprised financial markets by cutting its rate by 25 basis points to avoid inflation falling further. It said last month that it expected to keep the repo rate at that level to mid-2013.


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