Swedish Riksbank Retains Accommodative Monetary Stance

October 25, 2012

The Executive Board’s latest economic review of Sweden resulted in downward revisions to projected growth and inflation for 2012, 2013, and 2014 as shown below.  Inflation will continue to undershoot the 2% target by a wide margin next year because of “low cost pressures in recent years and earlier strengthening of the krona.”

  2012 2013 2014
GDP old 1.5% 1.9% 2.8%
GDP new 0.9% 1.8% 2.7%
CPI old 1.2% 1.3% 2.6%
CPI new 0.9% 0.7% 2.4%
Core CPI old 1.1% 1.6% 2.0%
Core CPI new 1.0% 1.1% 2.0%

A continued low repo rate will stimulate the economy so that inflation rises towards the target of 2 per cent. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at 1.25 per cent and to lower the repo-rate path. It is now more probable that the repo rate will be cut rather than being raised during the winter. Compared with the assessment in September, the repo rate is expected to be raised at a later stage and at a slower pace.

The majority released a repo rate flight path that puts such at 1.3% at the end of 2013, 1.9% late in 2014 and 2.6% in 4Q15.  The Board’s two most dovish members, Svensson and Ekholm, again cast dissenting votes favoring more stimulus now than the majority and lower repo rate levels in the future.  Svensson would like to see the repo rate at 0.75% now instead of 1.25% and then cut to 0.50% next quarter.  Ekholm prefers a 1.0% repo rate now and 0.75% during the bulk of 2013.

Three observations about Sweden’s economy made in the statement are

  1. The Swedish economy has so far shown resilience to the debt crisis in Europe,
  2. But now Swedish exports are being clearly dampened by the weak activity in the euro area.
  3. The recovery in the labor market is now expected to be slower.

The last change of the repo rate, a cut of 25 basis points, was implemented in September 2012.  There were also cuts of 25 bps in December 2011 and February 2012.  Between July 2010 and June 2011, the key rate had been lifted from 0.25% to 2.0% in seven steps.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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