Swedish Riksbank Policy Remains on Hold

April 20, 2010

Swedish central bank policymakers left their key repo rate at 0.25%, its level since July 2009, which was what analysts predicted.  They released new forecasts, cutting projected headline CPI inflation in 2010 and 2011, reducing 2009 and 2010 growth, but leaving the projected repo rate path as it was.  A statement indicates that the onset of rate increases will be in summer or perhaps early autumn.  One monetary official, Svensson, again dissented but backed away from his prior call for a 25-bp repo rate cut to zero now and instead merely preferred to hold off the first rate increase until later this year.

Total CPI inflation is now put at just 1.1% this year, followed by 2.1% in 2011 and 2.9% in 2012.   Core inflation of 2.0% this year, which is also the target, slides to 1.3% in 2011 and doesn’t approach target again until the end of the forecast horizon with a projected 1.8% in 2012.  After tumbling 4.9% in 2009, real GDP is expected to increase 2.2% this year, 3.7% in 2011, and 3.1% in 2012.  The explicit point is made that the very low 0.25% needs to be maintained a while longer not just to promote economic recovery but to ensure that inflation does rise back to target by the end of the forecast period. Inflation continues to be suppressed by slack in the economy, an appreciating currency, and high unemployment which foreshadows subdued wage pressures.  The statement concedes that positive growth in jobs has begun sooner than feared.

The prior repo rate peak until the end of 3Q08 was at 4.75%.  Then three cuts totaling 275 bps were implemented during 4Q08 followed by one of 100 bps in 1Q09, one of 50 bps in 2Q09 and a final 25-bp move last July.  Officials expect the repo rate to rise to 1.1% by the first quarter of 2011, 2.8% a year later, and 4.0% by early 2013.  Financial markets in Sweden are more stable, permitting the onset later this year of a process of restoring a more normal policy.

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

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