Swedish Riksbank Engineers First Repo Rate Cut since July 2009

December 20, 2011

Sweden’s repo rate has been reduced to 1.75% from 2.0% in a move that analysts anticipated.  Seven previous rate increases of 25 basis points apiece had been implemented in June, September, October and December of 2010 and February, April and July of this year.  The Riksbank Executive Board also issued new guidance for future changes in the repo rate that imply a considerably flatter upward path.  After the previous meeting two months ago, the indication was a likely rate increase of 50 basis points in 2012, another 50 bps in 2013 and 25 bps in 2014.  Now, officials do not expect a need for any net rise in 2012.  The repo rate later is apt to average 2.4% in the final quarter of 2013 and 3.2% in the last quarter of 2014. 

The new central bank statement projected GDP growth in 2012 downward to 1.3% and predicts growth of 2.3% in 2013 and 2.6% in 2014.  All of these projections are well below growth of around 4.6% in 2011.  Projected CPI inflation next year has also been reduced to 1.5% from 1.9%.  That is followed by 2.0% in 2013 and 2.7% in 2014.  The debt problems and mandated fiscal restraint in Euroland and Britain are already constraining the economy of Sweden, where export orders have lost strength. 

In cutting the repo rate, officials have thus reacted preemptively to a likely slower rate of growth and taken advantage of “low” underlying inflationary pressure.  The Executive Board’s two most dovish members, Ekholm and Svennsson wanted a more aggressive rate cut of 50 basis points and preferred a rate path that would hold the repo rate at 1.25% past mid-2013 and raise such thereafter only as far as 3.0% by 4Q14.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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