Swedish Riksbank Keeps Rate Unchanged, Cuts Tightening Path

Sweden’s central bank kept its benchmark interest rate unchanged and signaled fewer increases to safeguard an expansion in the largest Nordic economy as European leaders struggle to contain the debt crisis.

The benchmark repo rate was kept at 2 percent for a second consecutive meeting, as expected by all 27 economist surveyed by Bloomberg, the Stockholm-based Riksbank said today. The bank lowered its repo rate forecast for the fourth quarter next year to 2.3 percent from 2.6 percent.

“The difficulties in resolving the public finance crisis in Europe has led to increased uncertainty,” the bank said in its statement. “In Sweden, growth is expected to be slightly weaker in the coming period. At the same time, inflationary pressure is low. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at 2 percent and to wait to increase it until sometime next year.”

The Riksbank’s six policy makers last month unanimously halted a cycle of seven increases since July last year as the debt crisis that started in Greece threatens to engulf the region’s larger economies and imperil global growth. Sweden relies on exports for about half its economic output, of which half is bound for the European Union.

‘Strong Reluctance’

While the bank cut its tightening outlook, its decision to signal rates will still rise “displays a very strong reluctance to accept that we’re facing a slowing economy, which contrary to their beliefs, requires cuts,” said Par Magnusson, chief economist at Royal Bank of Scotland Plc in Stockholm. “There is still an overwhelming likelihood they will cut in December.”

The krona gained 0.2 percent against the euro to 9.0505 at 10:21 a.m. in Stockholm. Against the dollar, it traded 1 percent stronger at 6.4591.

Two of the bank’s board members argued in favor of a cut. Deputy Governors Karolina Ekholm and Lars E.O. Svensson wanted the bank to lower the rate to 1.75 percent and preferred a rate path that stays at 1.5 percent from the first quarter of 2012 through the same period in 2013.

The Riksbank cut its outlook for economic growth next year to 1.5 percent from 1.7 percent previously, it said today. Output will expand 2.4 percent in 2013 and 2.5 percent the following year, it said. Underlying inflation, which strips out the impact of interest rates, will average 1.3 percent in 2012, versus an earlier forecast for 1.5 percent, the bank said. Inflation by that measure won’t reach the bank’s 2 percent target until 2014, it said.

‘Too Optimistic’

“We regard their economic outlook as too optimistic,” said Andreas Jonsson, an economist at Nordea Bank AB. “Going forward, we expect the Riksbank to gradually revise down their economic forecast and the repo rate path.” Nordea, the largest Nordic lender, expects the repo rate to stay unchanged until April, when it predicts at cut.

European leaders at a summit overnight persuaded bond investors to take 50 percent losses on Greek debt and boosted the rescue fund to 1 trillion euros ($1.4 trillion). Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to step up debt reduction and a signal from leaders that the European Central Bank will keep up bond purchases.

Industry Contracts

Since the Riksbank’s rate meeting last month, data in Sweden have shown a deepening manufacturing contraction and slumping consumer confidence. The economy, home to wireless network maker Ericsson AB and retailer Hennes & Mauritz AB, will grow 1.3 percent next year, the government estimated in September, slashing an earlier forecast for 3.8 percent expansion. Output was 5.7 percent in 2010, the most in the European Union.

Slowing inflation and the prospect of declining home prices are also easing pressure on policy makers. Underlying inflation, which strips out rate changes, slowed to 1.5 percent in September and has held below the Riksbank’s 2 percent target all year. Some 67 percent of Swedes expect house prices to fall or stay unchanged over the next 12 months, a survey by SEB released this month showed.

Central banks around the world have returned to crisis containment, also reducing the scope of Swedish policy makers to raise rates as they avoid fanning currency gains and hurting exports. The central bank in neighboring Norway last month kept its rate unchanged for a third meeting because of “uncertainty abroad” and weaker domestic growth prospects. The U.S. Federal Reserve has said it will probably keep its rate near zero until mid-2013 while the European Central Bank has signaled it may cut rates to stave off a recession.

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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