Dual Messages from the Swedish Riksbank as Initial Rate Hike is Made

July 1, 2010

By a 4-2 vote, the Executive Board agreed on Sweden’s first rate hike of the cycle, doubling the repo rate to 0.50% and thereby restoring such to a level last seen from April to early July of last year.  Officials also noted that three low-costing central bank loans, which expired yesterday, would not be replaced, thus helping to reabsorb liquidity. Board members Ekholm preferred not raising the rate until September, and Svensson wished to delay the move into the fourth quarter.  During the world recession, the repo was slashed by 275 basis points in three steps during 4Q08, 100 bps in a single move in 1Q09, 50 bps in a single move in 2Q09 and one final drop of 25 basis points a year ago.  Sweden schedules only six monetary policy meetings each year.

New macroeconomic and interest rate forecasts were unveiled in today’s released statement.  The reasons for tightening now are

  • Sweden’s economy is “developing strongly.”  Projected GDP growth in 2010 has been revised upward to 3.8% from 2.2%.
  • Although inflationary pressure is presently low, the strengthening economy will lift CPI inflation.  The succession of annual CPI inflation projected by Bank officials now runs from 1.2% this year to 2.0% in 2011 and a downwardly revised 2.4% in 2012.
  • Household indebtedness has climbed significantly.
  • It is prudent to raise the repo rate gradually toward more normal levels against this backdrop.

All of the above was as expected.  The surprise came from a sentence that read, “The weaker development of the economies of the euro area means that the repo rate in the longer term is not expected to be raised as rapidly as previously assumed.”  Almost no central banks forecast their own policy in a quantifiable way.  The Swedish Riksbank is an exception, as it publishes an expected trajectory for its own repo rate after each policy meeting.  Such is now forecast to average 0.9% in the fourth quarter of 2010, 2.1% by the third quarter of 2011, 3.1% in the third quarter of 2012 and 3.8% in the third quarter of 2013.  The forecast of 3.1% in 3Q12 represents a downward revision from 3.5%.  Core inflation in 2011 and 2012 is now projected at less than the 2% target.

The two dissenting votes and the allusion to concerns about euro area growth imply that policy will be flexible.  While the forecast suggests a rate increase of 50 basis points in 4Q10, that is just a forecast.  Obviously, if European and other stock prices continue to fall like a rock, the plan to tighten again this year will need to be scrapped, as presumably such would be followed by cumulating evidence of weakening regional and Swedish economic activity.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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