Sweden keeps rate, forecast for hike late 2019/early 20204th July 2019
Sweden’s central bank left its benchmark repo rate unchanged at minus 0.25 percent, as expected, and said it remains on track to raise its rate “again towards the end of the year or at the beginning of next year” as economic activity remains strong and inflation is close to its target.
In December 2018 Sveriges Riksbank raised its rate for the first time in 7-1/2 years and had pencilled in another rate hike in the second half of this year.
But in April the Riksbank pushed back its timeframe for the rate hike to late 2019 or early 2020 as inflation was slightly weaker than expected.
Today the Riksbank’s executive board said Sweden’s economy had developed largely in line with its forecast from April despite higher uncertainty abroad and “increasing unease over further deterioration in trade relations and a faster decline in global economic activity.”
Although the Riksbank maintained its forecast for the repo rate to slowly return to positive rates in coming years, it acknowledged global developments may impact Sweden, which “underlines the importance of proceeding cautiously with monetary policy. If the conditions for inflation change were to change, monetary policy will be adjusted.”
In an update to its forecasts, the Riksbank saw the repo rate averaging -0.2 percent this year, unchanged from April, then 0.1 percent in 2020 and 0.5 percent in 2021.
Economic activity in Sweden has remained solid in recent months and the central bank raised its forecast for 2019 growth to average 1.8 percent from April’s forecast of 1.7 percent and 2018’s 2.4 percent.
Next year growth is expected to cool to 1.6 percent, down from the previous forecasts of 1.9 percent, and then accelerate to 1.8 percent in 2021.
Sweden’s gross domestic product slowed slightly to 2.1 percent annual growth in the first quarter of this year from 2.4 percent in the previous quarter
Inflation in Sweden has been close to the Riksbank’s 2.0 percent target since early 2017 with core inflation up to 2.1 percent in May from 2.0 percent in April.
The central bank lowered its 2019 forecast for core inflation to 1.7 percent from a previous 1.8 percent but retained the forecasts for 1.8 percent inflation in 2020 and 1.9 percent in 2021.
Sveriges Riksbank released the following press release (tables excluded)
“Repo rate unchanged at −0.25 per cent
Economic activity in Sweden remains strong and inflation is close to the target of 2 per cent. Uncertainty abroad has increased but new information since the monetary policy decision in April has not led to any major revisions of the forecasts overall. With continued support from monetary policy, the conditions for inflation to remain close to the target in the period ahead are considered good. The Executive Board has decided to hold the repo rate unchanged at –0.25 per cent. The forecast for the repo rate is also unchanged and indicates that it will be increased again towards the end of the year or at the beginning of next year. However, the risks surrounding developments abroad can have a bearing on the prospects for Sweden, which emphasises the importance of proceeding cautiously with monetary policy.
Good economic activity but increased uncertainty abroad
Developments both in Sweden and abroad are largely in line with the Riksbank’s forecasts. However, increasing unease over further deterioration in trade relations and a faster decline in global economic activity have clearly affected pricing on the financial markets, where interest rates on the whole have fallen. But growth abroad is relatively good and confidence among both households and companies indicates normal growth in the coming period. With the information now available, the Riksbank assesses that there is no reason to make any major adjustments to the forecasts for international inflation and growth.
Activity in the Swedish economy has remained high since the monetary policy meeting in April. Resource utilisation is expected to be high even though developments on the labour market will enter a calmer phase in the years ahead. Inflation has been close to 2 per cent since the beginning of 2017. In line with the Riksbank’s forecast, CPIF inflation amounted to 2.1 per cent in May.
The economic outlook and inflation prospects remain good. Overall, the new information since the monetary policy meeting in April has not changed the assessment of the conditions for inflation to remain close to 2 per cent. The Executive Board has therefore decided to leave the repo rate unchanged at –0.25 per cent. The forecast for the repo rate is also unchanged and indicates that it will be increased again towards the end of the year or at the beginning of next year. This means that inflation will receive continued support from monetary policy to remain close to 2 per cent. In accordance with the decision in April, the Riksbank will purchase government bonds for a nominal amount of SEK 45 billion, with effect from July 2019 to December 2020.
However, the risks concerning international developments may have a bearing on the economic outlook and inflation prospects for Sweden as well. The downturn in international bond yields can indicate that global interest rates going forward will be low for a longer period to come. This underlines the importance of proceeding cautiously with monetary policy. If the conditions for inflation change were to change, monetary policy will be adjusted.
Important to have measures to reduce 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. In order to reduce the risks linked to household indebtedness and address the structural problems on the Swedish housing market, measures within housing and tax policy and appropriate macroprudential policy are required.”
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