Wednesday, April 29, 2015

Sweden holds rate but boosts QE, drops rate path

    Sweden's central bank maintained its benchmark repurchase rate at minus 0.25 percent but raised its target for purchasing government bonds by a further 40-50 billion Swedish crowns to ensure that deflation doesn't return and consumer prices continue to rise.
    The Riksbank, which has cut its rate by 25 basis points this year following an unscheduled cut of 15 points in March and a 10 point cut in February, underscored its "very limited" tolerance for low inflation and again pledged that it was "highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings."
    In addition, the Riksbank said it could further expand its purchase of bonds, with the new target now at 80-90 billion krona and purchases being made from May to end-September.
    As in March, the Riksbank said it was prepared to launch a program to lend money to companies via banks and was ready "to intervene on the foreign exchange market if the upturn in inflation is threatened as a result, for instance, or a very troublesome market development."
    Underscoring its expansionary policy stance, the Riksbank lowered the expected path for raising the repo rate. The repo rate is now projected to average minus 0.29 percent in second quarter of 2016 - raising the possibility of further rate cuts - compared with its February forecast of minus 0.12 percent.
    For 2016 the repo rate is expected to average minus 0.2 percent, down from its previous forecast of zero percent, and for 2015 it is seen averaging minus 0.2 percent, down from minus 0.1 percent.
   By the second quarter of 2017 the repo rate is seen rising to an average 0.24 percent, down from 0.83 percent in February and then slowly rise to 0.78 percent by second quarter of 2018. The average forecast for the repo rate in 2017 was 0.3 percent, down from February's forecast of 0.9 percent.
    Sweden's consumer price inflation rate rose to 0.2 percent in March, the second consecutive month of inflation after six months of deflation, and the Riksbank raised its forecast for average 2015 inflation of 0.3 percent from February's 0.1 percent forecast.
    For 2016 inflation is seen rising further to 2.1 percent from 1.9 percent and to 2.7 percent in 2017, slightly below the previous forecast of 3.3 percent. The Riksbank targets 2.0 percent inflation.
    The central bank's expansionary policy of pushing down interest rates has not only helped boost demand but also weakened the exchange rate of the crown, helping the internationally competitive position of exports and raising the cost of imported prices and thus inflation.
    The Riksbank's forecast for economic growth in 2015 was raised to 3.2 percent from a previous 2.7 percent and the 2016 forecast was upped to 3.4 percent from 3.3 percent and the 2017 forecast to 2.7 percent from 2.2 percent.

    Sveriges Riksbank issued the following statement:

The expansionary monetary policy is having a positive impact on the Swedish economy and inflation has begun to rise. To ensure this development continues, the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion. In addition, the repo-rate path has been lowered significantly compared with the decision in February. The repo rate has been left unchanged at −0.25 per cent but may be cut further. Slow increases in the repo rate are not expected to begin until the second half of 2016. These measures and the readiness to do more underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation. 

Economic activity strengthening

Economic activity abroad continues to slowly improve. Although the development of economic activity abroad continues to be uncertain, the recovery in the euro area appears to be on firmer ground. GDP growth in Sweden is good and the labour market is continuing to improve.

Inflation is rising from low levels

Inflation has begun to rise, although from low levels. This is partly due to the weakening of the krona over the last 12 months, which has led to higher import and goods prices. However prices for services, which are not affected as much by the exchange rate, are also increasing more rapidly than last year. At the same time, inflation expectations have increased somewhat. As economic activity improves, it will become easier for companies to raise their prices. But it is uncertain how quickly this will happen, particularly given the fact that inflation has been lower than expected on several occasions. Weaker international economic activity or a rapid appreciation of the krona could also lead to inflation not rising fast enough.

Further measures to ensure that inflation continues to rise

To support the positive development and ensure that inflation rises sufficiently quickly, the Executive Board of the Riksbank has decided to extend the purchases of nominal government bonds by a further SEK 40-50 billion. The purchases will be made during the period from May to the end of September and will comprise maturities of up to 25 years. The purchases decided on by the Riksbank to date thus comprise SEK 80-90 billion. At the same time, the repo-rate path has been lowered significantly compared with the decision in February. Slow increases in the repo rate from −0.25 per cent are not expected to begin until the second half of 2016. The repo-rate path also reflects the fact that it is possible to cut the repo rate further.

The Riksbank's measures are pushing down interest rates for households and companies. This will increase demand in the economy, which will make it easier for companies to pass on their cost increases to consumer prices. The expansionary monetary policy will also contribute to the krona remaining at a weaker level for a longer period of time, which will lead to a faster increase in the demand for exports and higher prices for imported goods. CPIF inflation is expected to reach 2 per cent at the turn of the year 2015-2016.

Readiness to do more

Monetary policy reflects the fact that the Riksbank's tolerance for low inflation is very limited. The Riksbank is still highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings. The purchases of government bonds can be extended. Moreover, the repo rate can be cut further and future increases can be implemented more slowly. The Riksbank is also prepared to launch a programme for loans to companies via the banks and to intervene on the foreign exchange market if the upturn in inflation is threatened as the result, for instance, of a very troublesome market development. Purchases of other assets than government bonds are also a possibility.

Financial risks must be managed

Monetary policy now needs to be highly expansionary to push up inflation and 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. It is therefore important that the government and other authorities implement measures that reduce the risks relating to household indebtedness. Rapid price increases for high-risk financial assets also entail risks that require increased vigilance in the period ahead.

 The decision on the repo rate will apply with effect from 6 May. The minutes from the Executive Board's monetary policy discussion will be published on 12 May. 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,"


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