Swedish Riksbank to Ease at Least 50 Basis Points on Wednesday

February 10, 2009

A rate cut will be announced at 08:30 GMT tomorrow.  It will be Sweden’s fourth central bank rate cut since October 8th.  After an ill-advised final rate hike in early September, there were two cuts of 50 bps apiece in October and one of 175 bps to 2.0% on December 4th.  At the time of the third easing, it was fashionable among many central banks, including the Swedish Riksbank, to front-load easing.  Street analysts had expected December’s cut to be 75 bps in size, and Swedish officials released a projected rate path at the time of December’s cut that implied no more reductions.  The repo rate was projected at 2.0% in the fourth quarter of 2009 and at 2.5% in the fourth quarter of 2010.  Both the second and third Swedish rate reductions were taken after unanimous 6-0 votes, and a statement released in December spoke of unexpectedly rapid and clear deterioration in economic activity and lessening inflation.

It is now apparent that the 275 basis points of rate reduction in 4Q09 will not be nearly enough.  Global prospects have darkened much more, and December’s forecast 0.5% drop in Swedish GDP will be surpassed at least twofold.  The 7.1% on-year decline in industrial production that officials observed in October tripled to a 20.3% plunge by December.  The factory PMI reading in January of 33.8 was only marginally above December’s record low.  Industrial and consumer sentiment are very depressed. Industrial orders dropped 22% in the year to December, and retail sales posted a comparatively moderate 1.1% drop over that period.  On-year CPI inflation of 0.9% in December was down from 3.5% in December 2007 and already below the projection of 1.2% for 2009 as a whole.

On the same day as Sweden’s December’s rate cut, the ECB cut its refinancing rate by 75 bps to 2.5%, and such was cut further to 2.0%  in January when Riksbank policymakers did not meet.  Thus, the two banks now have the same rate level going into Sweden’s meeting today.  That will change tomorrow.  Whereas the ECB did not cut its rate last week, their Swedish counterparts will not similarly pass.  The Swedish krona has been moving in lock-step with the euro, with no net change since December 4th.  Oil prices are some 9% lower now than then, augmenting disinflation related to inadequate aggregate demand.  The market consensus for tomorrow’s decision is 50 basis points.  A cut of that size would be proper, and I would not be surprised to see a somewhat more aggressive move.  The Executive Policy Board only holds six interest rate meetings per year, far fewer than the ECB and Bank of England and even fewer than the Fed and Bank of Canada, so it is imperative for officials not to approach them timidly.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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