Swedish Riksbank Reduced Repo Rate to 2.0% from 3.75%

December 4, 2008

After cuts of 50 basis points each on October 8th and 23rd, Swedish monetary officials declared “an unexpectedly rapid and clear deterioration in economic activity” that requires an outsized 175-basis point further reduction of its repo rate to 2.0%. A second message from officials is that “the repo rate is expected to remain at this [new] level over the coming year. Unlike most central banks, the Riksbank forecasts the likely path of its policy interest rates as well as projections of future growth and inflation. Bear in mind, however, that the interest rate indications are forecasts only and change as information changes. Since introducing this feature, It has been rarer for the Riksbank to follow its interest rate path to a T than to modify it, often radically as today.

A statement was released tying today’s forceful step not merely to a lower trajectory of expected growth and inflation but also to a reduced effectiveness of monetary support in today’s environment of persisting financial market turbulence around the world. The statement observes that several economic indicators are at historic lows and that cost pressures related to commodities are lower. Inflation is projected to run below the 2% target for the coming two years, averaging 1.2% in 2009 and being only at 1.5% at the end of next year. But inflation is seen returning to 2.0% by the end of 2010. Projected growth of minus 0.5% in 2009 gives way to positive projected growth of 2.2% in 2010 and 3.0% in 2011. The new and old growth and price forecasts can be seen in the statement that I have hyper-linked, as can the projected lower path for the repo rate, which remains at 2.0% to end-2009, climbs by 50 basis points during 2010, and reaches 3.2% by the end of 2011. Minutes for today’s meeting will be released on December 17th. Minutes from the October 23rd meeting revealed a unanimous 6-0 vote in favor of the rate reduction decided then.


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