Swedish Riksbank Repo Rate Cut to 1.25% from 1.50%

September 6, 2012

In a somewhat surprising move, the Executive Board of central bank in Sweden cut its main interest rate for the third time in five meetings.  The first cut since July 2009 was announced in December 2011 and followed by an easing at the subsequent meeting in February.  The policy modification was driven by a new inflation forecast, not the view on growth.  To be sure, growth is considered likely to be slower in the second half of 2012 than the first half, but GDP expansion forecasts of 1.9% next year and 2.8% in 2014 are not much different from the previous projections.  The Board’s statement nonetheless takes a more optimistic view on inflation because of a stronger than expected krona and in light of stronger productivity growth.  Core and headline inflation stay below 2% in both 2012 and 2013.

The Riksbank gives more precise guidance regarding the likely future path of its main interest rate than do other central banks.  The Board majority’s new view is that the repo rate will remain at 1.25% for about a year, then rise gradually to 2.25% by end-3Q14 climb an additional 75 basis points or so over the ensuing year.  There were two familiar dissenters, who wanted a 50-basis point cut to 1.0% now and a lower future repo path than the majority.  Lars Svenssen preferred a path with the repo rate dipping additionally to 0.75% by the end of this year, staying at that level most of next year and only returning to 2.0% by the third quarter of 2015.  Karolina Eckholm, like Mr. Svenssen, thinks the majority is too optimistic on growth; she’d like to see a 1.0% repo rate maintained for a year and the rate to rise only to 2.5% by the third quarter of 2015.

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

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