Swedish Monetary Policy Eased for the Third Time this Year and Fourth Time in Eight Months

July 2, 2015

The Riksbank’s six-person Executive Board surprised analysts with an interest rate cut, an augmentation of quantitative stimulus, a vow to intervene if needed, and a forecast that its easing cycle may not be over.  The new repo rate level of -0.35% is unlikely to rise before late 2016 and will probably be no higher than 0.81% three years from now according to a lower rate path than projected previously.  In a released statement, projected growth and CPI inflation in 2015 were also reduced slightly as was forecast core inflation in 2016 and 2017.

Board members are quite aware that negative interest rates and prolonged quantitative stimulus, which was introduced at SEK 40 billion in February, raised to SEK 80-90 billion in April and raised further today to SEK 125-135 billion, run risks, and one of the Board members dissented from today’s decision to ease.

The low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. As current debt levels already entail significant risks for the Swedish economy, it is essential that the government and other authorities implement measures that will reduce them. Rapid price increases for high-risk financial assets also require increased vigilance in the period ahead.

Those dangers are outweighed by the primary risk “associated with a situation in which inflation is too low.”  Officials seek a 2% inflation rate.  Although inflation has risen since the April meeting, “uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation.” 

Rate History:  Repo rate cuts of 25 basis points each were implemented in December 2011, February 2012, September 2012, December 2012 and December 2013.  Cuts of 50 bps in July 2014 and October 2014 lowered the repo rate to zero.  In mid-February of this year, a negative 0.10% repo rate level was set, and a quantitative easing program of bond purchases was launched, although it is not as big as the ECB’s.  The repo rate was moved to -0.25% in March, and QE was expanded by SEK 40-50 billion in April.  Today’s announced rate cut was by ten basis points further, and the size of QE was raised by another SEK 45 billion.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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