Swedish Monetary Policy Eased but Officials Expect No Changes Next Year

December 18, 2012

A 25-basis point cut in the Riksbank repo rate to 1.0% announced this morning was accompanied by rate guidance that 1.0% is likely to be both the average and endyear rate level in 2013. Risks around that level are balanced.  Today’s action had been anticipated and followed earlier 25-basis point cuts in December 2011 and February and September of this year. 

A released statement ties Sweden’s weak economy to downward pressure on a sub-target inflation rate.  Core inflation is projected at 0.9% both this year and in 2013, and the jobless rate is forecast to climb another 0.4 percentage points next year to 8.1% and drop to only marginally less than 7% in 2014.  The baseline central bank medium term view is optimistic about a revival of economic growth to 2.7% in 2014 and 3.2% in 2015, and that assumption is what drives inflation back to the 2.0% target and the projected repo rate up to 1.8% by the end of 2014 and 2.5% by end-2015.  Central banks and governments virtually always factor in trend growth within 2-3 years because that’s what generally happens in normal business cycles.  The length of the current stretch of sub-trend growth in developed economies has already far eclipsed 2-3%.  The Japanese economy, for example, is embarking on its third decade of sequential doldrums, and the notion of potentially sustainable trend growth there has been revised downward many times and over all to a substantial degree. 

As they have done habitually at earlier policy meetings, Eckholm and Svensson dissented from the four-person majority decision of the Riksbank’s six-person Executive Board.  They have been consistently less convinced that time heals economic weakness and sub-target inflation.  Svensson preferred a 50-basis point cut now, a further 25-bp reduction next spring, and the repo rate held at 0.50% through the winter of 2013-14.  Ekholm joined the majority in voting for a 25-bp cut now followed by a subsequent 25-bp cut in the spring. 

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

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