Swedish Riksbank Keeps Interest Rate in Pause Mode at 2.0%

October 27, 2011

After seven consecutive 25-basis point increases from June 2010 through July 2011, the Riksbank’s Executive Board left the repo rate at 2.0% after its September meeting and did the same today.  At both meetings, officials also flattened their forecast of the future path for their repo rate, which now allows for increases of 50 basis points in 2012, 50 bps in 2013, and 25 bps in 2014 as resource utilization and core inflation rise eventually.

Policymakers reduced their forecasts of inflation and core inflation in 2012 and 2013. They also cut projected 2012 GDP growth by 0.2 percentage points to 1.5%, which would be only about a third as much as the growth rate this year. 

Today’s statement from policymakers revealed that Ekholm and Svensson had favored a 25-bp cut now and a lower future rate path than accepted by the Board’s majority.  Their stance has become more guarded.  In September, these members had recommended a lower rate trajectory but did not also want an immediate rate cut.

Economic prospects are highly uncertain in Sweden, hinging mainly on the continuing evolution of the euro debt crisis.  Despite today’s relief rally in equities, its ominous that Euroland bond yields haven’t corrected more strongly.  And indeed, the lack of a plan to promote growth, the ECB’s continuing prioritization of low inflation above all else, and the failure to indicate how the cost of the bailout will be funded are reasons to remain skeptical that the crisis is over or even that a beginning to its end has begun.

Sweden’s monetary policy stance is best summed by a few passages in today’s statement.  “The difficulties in resolving the public finance crisis in Europe has led to increased uncertainty regarding the future.”  And “CPI inflation is high. This is mainly because mortgage rates have increased. Underlying inflationary pressure is currently low, but is expected to increase as resource utilisation rises.”  Finally, “there is a need to hold the repo rate at a low level to stabilise inflation around the target of 2 per cent and resource utilisation around a normal level. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at 2 per cent and to wait to increase it until sometime next year. Later on, when resource utilisation and inflationary pressures increase, the repo rate will need to be raised gradually.”

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



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