Sweden’s Central Bank Abandons Planned Rate Increase as Turmoil Dominates

Sweden’s central bank abandoned a planned interest-rate increase as global recovery prospects deteriorate, while policy makers held on to the option of raising rates in the largest Nordic economy once more this year.

The benchmark repo rate was left unchanged at 2 percent, interrupting a cycle of seven consecutive increases since July last year, the Stockholm-based Riksbank said today. The decision was expected by 24 of the 25 economists surveyed by Bloomberg. One had predicted an increase to 2.25 percent.

“The concern over public finances abroad has increased and global growth prospects have deteriorated,” the Riksbank said in the statement. “The slowdown in the Swedish economy is thus expected to be more pronounced than was forecast in July.”

Since the Riksbank’s July rate meeting, Sweden’s government has slashed its economic and budget forecasts, while central banks around the world have returned to crisis mode. The largest Nordic economy, which relies on exports for half its output, will grow 1.3 percent next year, less than half the government’s previous estimate, Finance Minister Anders Borg said Aug. 26.

The bank lowered its forecast for the rate path, while signaling it may raise the benchmark next quarter. It now sees the rate averaging 2.1 percent next quarter, down from 2.3 percent in its July report. The repo will average 2.4 percent in the third quarter next year, versus 2.9 percent previously, and 3 percent in the same quarter of 2013, the bank said.

Next Increase

The rate path signals a “high probability” that the bank will increase the rate to 2.25 percent this year, said Anna Raaman, a senior analyst at Nykredit Bank A/S. “We will have to wait and see if the financial turbulence abates or not, but if it does, then I think there is reason to deliver another hike” this year, she said.

The krona surged 0.7 percent against the euro to trade at 8.9878 at 10:16 a.m. in Stockholm. Against the dollar, the krona jumped 1.3 percent to 6.3823.

While Sweden’s economy will feel the impact of a global slowdown, “inflationary pressures are expected to increase gradually over the coming years, as the spare capacity in the economy declines and the rate of wage increases rises,” the Riksbank said.

“The Riksbank is still in hiking bias mode, but uncertainty is high,” said Anders Eklof, chief foreign exchange strategist at Swedbank AB, in a note. The krona may appreciate against the euro “as the market will stay with a theme that the krona and the Norwegian krone are new safe havens.”

Norges Bank

The bank’s decision to shelve its tightening cycle follows a similar about-face in neighboring Norway, where Norges Bank on Aug. 10 left its main rate at 2.25 percent. Policy makers in Oslo said they didn’t deliver the planned increase because of a “flare-up in financial market turbulence and clear signs of weaker growth internationally.”

The U.S. Federal Reserve last month said it will probably need to keep its rate near zero until the middle of 2013 while the European Central Bank shelved its rate increases and resumed bond purchases to counter the debt crisis.

Policy makers in Norway have signaled they want to avoid straying too far from international rates to prevent stoking krone gains. Sweden’s krona is the third-best performing major currency after the krone and the yen against the dollar and the euro since the Aug. 5 downgrade by Standard & Poor’s of the U.S. deepened a global market rout.

Krona Effect

“The argument that the Riksbank cannot raise interest rates without strengthening the krona too much is highly relevant,” Handelsbanken analysts Martin Enlund and Johan Sahlstroem said in a client note before the decision.

Riksbank Deputy Governors Karolina Ekholm and Lars E.O. Svensson entered reservations against the rate path, and said they preferred to keep rates unchanged until mid-2013, the bank said.

“A debt storm has swept in over Sweden,” Borg said last month. “Our task is to build security walls, to be careful, to have sufficient security margins, to have the ability to act if the risks we see materialize.”

Sweden’s economy slowed for a second consecutive quarter in the three months through June to an annual 5.3 percent, after growing the most in the European Union at 5.7 percent last year. Consumer confidence fell to its lowest level in two years in August as Swedish retail sales unexpectedly declined a monthly 0.7 percent the previous month.

Economic Outlook

Economic growth will slow to 1.7 percent next year from 4.5 percent in 2011, the Riksbank said today, cutting its previous 2.2 percent outlook for 2012.

Confidence among manufacturers slumped to the lowest in 16 months in August as industrial production increased at the slowest pace in more than a year in June and a survey indicated August manufacturing contracted for the first time since May 2009.

Inflation expectations for twelve months from now eased to 2.5 percent in August from 2.9 percent the previous month, according to a survey by the National Institute of Economic Research. The group last month recommended that the Riksbank keep its main rate unchanged until the spring.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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Swedish Central Bank Abandons Rate Increase

Casper Hedberg/Bloomberg

The headquarters of the Swedish Central Bank sit in Stockholm.

The headquarters of the Swedish Central Bank sit in Stockholm. Photographer: Casper Hedberg/Bloomberg