Swedish Riksbank Lops Another 50 Basis Points Off Its Repo Rate

October 23, 2008

Sweden’s central bank had been expected to ease by either 25 or 50 basis points further in follow-up to a 50-bp cut on October 8th, and it opted for the bolder and, in this analyst’s opinion, more appropriate action. Today’s reduction takes effect on October 29th, and minutes from the meeting will be released on November 5h. Sweden had tightened as recently as September and by a similar amount in February and July. Thirteen increases in all since January 2006 had lifted the repo rate to 4.75% to confront above-target inflation. Central banks around the world are in the financial crisis together, so every time any of them cuts rates and issues a new statement, it sheds light on how the whole fraternity of monetary policymakers is thinking. The revealing sentence in the statement released today by the Riksbank explains, “To alleviate the effects of the financial crisis in the Swedish economy, the repo rate needs to be cut relatively substantially over a comparatively short period.” A newly released projected likely future path for the repo rate embodies a further reduction from 3.75% to 3.25% within the next six months but suggests that level should be the bottom unless “the financial crisis intensifies, or if the effects on the real economy are more extensive.” These caveats are hardly remote possibilities. In this period, the Riksbank Executive Board will meet December, February, and April. Given the predisposition toward front-loading stimulus, a drop of at least 25 basis points in December seems probable.

New inflation and growth forecasts were released. On-year CPI inflation is expected to drop to 3.0% by December, representing a revision from 3.9% in the previous forecast made last month, and to 1.6% by December 2009, revised down from 2.3%. Real GDP is projected to edge just 0.1% higher in 2009, implying a likely recession. A 0.8% growth rate had been previously forecast.  Although the bias for interest rates surrounding the new baseline forecast seems skewed to the downside, officials allow for the possible need for higher-than-assumed rate levels if either 1) inflation doesn’t drop as much as assumed or 2) the krona stays excessively weak.

The cause of the central bank’s policy about-face is the global financial crisis, which “has led to higher loan costs for companies and households, lower capital wealth, and increased uncertainty in general.” From all of this, officials expect an economic downturn with weaker labor market conditions and lower inflation. Besides cutting interest rates, Riksbank officials intend to keep taking other liquidity-enhancing measures like the daily injection of funds they have been doing.


One Response to “Swedish Riksbank Lops Another 50 Basis Points Off Its Repo Rate”

  1. […] to mention the Fed next week. Plus, a deteriorating global economy demands acting with dispatch. Here’s what I wrote in commentary after the Swedish repo rate was cut by 50 basis points to 3.75% on […]