Thursday, April 26, 2018

Sweden holds rate, pushes back rate hike to end-year

       Sweden's central bank left its benchmark repo rate at minus 0.50 percent but pushed back its forecast for a rate hike to "towards the end of the year" from "during the second half of this year", saying continued support from monetary policy is needed to keep inflation on target.
       Sveriges Riksbank, which has maintained its ultra-low rate since February 2016, said it is proceeding "cautiously" when approaching what would be the first rate hike since July 2011 as the risks of too low inflation are more difficult to manage when interest rates are at current levels than when inflation is too high.
       "If the conditions for inflation were to change, the Executive Board is prepared to adjust monetary policy," said the Riksbank.
       Although economic activity in Sweden remains strong and headline inflation is close to the central bank's target, the Riksbank said underlying inflation had been lower than expected and this raised questions about the strength of recent price increases.
       Part of the reason for higher inflation stems from the recent rise in higher energy prices and a weakening of the krona's exchange rate in recent months.
       The Riksbank said it wants economic activity to remain strong to impact prices and ensure that the exchange rate "develops in a way compatible with inflation stabilizing close to the target."
       Arguing in favor of raising rates, the Riksbank said low rates are helping raise the risks from high and rising household debt but the fundamental causes of high debt still remain and the answers lie in housing and taxation policy, and in some cases macro prudential policy.
       As in February, Deputy Governor Henry Ohlsson voted to raise the repo rate by 25 basis points due to strong economic growth in Sweden and abroad.
       Today's decision by the Riksbank was expected by financial markets as inflation has decelerated in recent months and the Riksbank wants to ensure that inflation rises sustainably to its 2.0 percent target after undershooting since January 2012.
       In response to the Riksbank's dovish decision, the Swedish krona eased to 8.58 to the U.S. dollar from 8.54, or by 0.5 percent, and is now 4.5 percent below the level at the start of this year.
       Sweden's headline inflation rate rose to 1.9 percent in March from 1.6 percent in the two preceding months while underlying inflation - the Riksbank's preferred inflation gauge that is known as CPIF inflation - hit 2.0 percent in March.
       In an update to its forecast, the Riksbank raised its headline inflation forecast for 2018 to 1.8 percent from 1.7 percent in February but kept the 2019 forecast steady at 2.6 percent. For 2020 headline inflation is seen rising to 2.9 percent.
      Underlying inflation is also seen higher and averaging 1.9 percent this year, up from 1.8 percent previously forecast, but then remaining steady at 1.9 percent in 2019 before rising to 2.0 percent in 2010.
      The path for the repo rate was lowered to minus 0.5 percent for 2018 from minus 0.4 percent and then to minus 0.1 percent for 2019 from a previous zero percent. For 2020 the repo rate is seen averaging 0.5 percent, down from 0.6 percent.
      Economic activity is seen slightly weaker this year than previously forecast, with Gross Domestic Product up by 2.6 percent compared with 2.8 percent, but up from 2017's 2.4 percent. But in 2019 growth is seen rising by 2.0 percent, up from 1.8 percent forecast in February.
      In the fourth quarter of last year Sweden's GDP expanded by an annual rate of 3.3 percent, up from 2.9 percent in the second quarter, for average 2017 growth of 2.4 percent, down from 3.2 percent in 2016.

    Sveriges Riksbank issued the following statement:

"Economic activity in Sweden is still strong and inflation has been close to the target for the past year. However, underlying inflation has been somewhat lower than expected recently, which raises questions regarding the strength of the development in inflation. If inflation is to remain close to the target going forward, continued support is needed from monetary policy. The Executive Boardhas therefore decided to hold the repo rate unchanged at −0.50 per cent and assesses that the rate will begin to be raised towards the end of the year, which is somewhat later than previously forecast.

Strong economic activity abroad and in Sweden
The overall picture of the economic outlook and inflation prospects remains largely unchanged since the monetary policy meeting in February. Economic activity abroad is continuing to strengthen. However, despite growth being at a high level and unemployment having fallen, inflationary pressures remain moderate, particularly in the euro area.
Conditions in the Swedish economy are strong; the employment rate is high and unemployment has fallen to the lowest level since the financial crisis. Inflation has been close to the target over the past year. In March, CPIF inflation was 2.0 per cent.

Weaker krona but lower underlying inflation
One reason why inflation is now 2 per cent is that energy prices have increased rapidly. Underlying inflation, on the other hand, has been unexpectedly low recently, which raises questions regarding the strength of the development in inflation. The weakening of the krona exchange rate in recent months is contributing to higher inflation, but if CPIF inflation is to remain close to the target going forward, it is important that economic activity is strong and has an impact on price developments. It is also important that the krona exchange rate develops in a way compatible with inflation stabilising close to the target.

Inflation needs continued support from monetary policy
Monetary policy therefore needs to remain expansionary and the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent. Given the questions regarding underlying inflation, the forecast for the repo rate has been revised down somewhat and indicates that the rate will start to be raised at a slow pace towards the end of the year. The Riksbank’s holdings of government bonds amount to just over SEK 320 billion, expressed as a nominal amount. Until further notice, redemptions and coupon payments will be reinvested in the bond portfolio.

Monetary policy needs to proceed cautiously
It has taken a long time to bring up inflation and inflation expectations, and there is considerable uncertainty over the development of inflation. Monetary policy thus needs to proceed cautiously. If the conditions for inflation were to change, the Executive Board is prepared to adjust monetary policy. The risks of too low inflation merit particular attention, as at the prevailing interest rate levels this is more difficult to manage than inflation that is too high.

Important with measures to reduce risks linked to household indebtedness
The low interest rates contribute to increasing the risks linked to high and rising household indebtedness. At the same time, the fundamental causes of the high household indebtedness still remain. Achieving long-term sustainable development in the Swedish economy therefore requires measures within housing policy, taxation policy and, where necessary, within macroprudential policy.

Deputy Governor Henry Ohlsson entered a reservation against the decision to maintain the repo rate at its current level and against the repo-rate path in the Monetary PolicyReport. He advocated raising the repo rate to −0.25 per cent with reference to thestrong economic growth in Sweden and abroad.
The decision on the repo rate will apply from 2 May 2018. The minutes from the Executive Board’s monetary policy meeting will be published on 8 May. A press conference with Governor Stefan Ingves and Jesper Hansson, Head of the Monetary Policy Department, will be held today at 11 a.m. in the Riksbank. Press cards must be shown. The press conference will be webcast live at


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