Euro Crisis Growth Pains Prompt Rate Cuts From Sweden to Turkey

Central banks in Sweden, Hungary and Turkey cut interest rates today as the fallout from the euro area’s sovereign-debt crisis dims growth prospects for some of the biggest economies in its vicinity.

The Swedish repo rate was lowered by a quarter of a percentage point to 1 percent, the Stockholm-based Riksbank said, as it signaled it will probably keep the benchmark unchanged until the end of 2013. Hungary’s central bank cut the European Union’s highest benchmark rate for a fifth month and its counterpart in Turkey lowered its benchmark interest rate today for the first time in 16 months to a record low.

The decisions follow the European Central Bank’s revelation that the euro region may need to wait until the second half of next year for a recovery. While the ECB benchmark rate is already at a record-low 0.75 percent, a majority of policy makers were also open to easing borrowing costs on Dec. 6, according to three officials speaking on condition of anonymity.

“It’s rather similar in these countries.” Lars Christensen, chief emerging-market analyst at Danske Bank A/S (DANSKE), said in a telephone interview from Copenhagen. “We see economic weakness globally, that is triggering monetary easing by basically all major central banks, or at least there are expectations of that.”

Swedish Cut

Sweden’s central bank reduced its benchmark interest rate for a fourth time in a year. The country’s $540 billion economy, which relies on exports for about half its output, is struggling to expand as the debt crisis in Europe erodes demand for its goods and services.

The Riksbank, which provides investors with predictions on future borrowing costs, said it expects the rate to be at 1.1 percent in a year, versus an October forecast of 1.3 percent. Officials also cut their outlook for economic growth next year, predicting 1.2 percent expansion, compared with an October forecast of 1.8 percent.

“They did the right thing,” said Knut Hallberg, an analyst at Swedbank AB (SWEDA) in Stockholm. “There is a slight, slight chance of another cut” next year as “it’s going to be a tough winter.”

Riksbank Governor Stefan Ingves predicted today that “both growth and inflation will be slow” in 2013 because consumer sentiment has weakened and exports will suffer from weaker European demand. Ericsson AB, the world’s largest maker of mobile phone networks, and truck maker Volvo AB (VOLVB), are among Swedish companies cutting thousands of jobs in response to shrinking markets.

The krona was up 0.3 percent to 8.7372 against the euro as of 2:23 p.m. in Stockholm.

Eastern Europe

In Hungary, the Magyar Nemzeti Bank lowered the two-week deposit rate to 5.75 percent from 6 percent, the fifth quarter- point cut in as many months, matching the forecast of all 19 economists in a Bloomberg survey. That move chimes with the policy of central banks across eastern Europe.

The Hungarian forint fell to the lowest level in almost five months today, trading 0.2 percent lower at 288.61 per euro by 3:31 p.m. in Budapest.

Central bankers in Poland, the only country in the 27- nation European Union to raise rates this year, cut borrowing costs on Dec. 5 and said they will ease policy further as the EU’s biggest eastern economy faces the risk of its first recession in two decades. It may cut the benchmark for a third month in January from 4.25 percent, policy maker Jerzy Hausner said Dec. 12.

‘Strengthen Exports’

The Czech central bank reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three- quarters of a point less than the euro-area benchmark. Don Egginton, an economist at Daiwa Capital Markets in London, predicts that Czech officials may next resort to other measures to aid economic growth.

“They might stimulate their economy to use foreign reserves to weaken the currency and strengthen exports,” said Egginton, a former official at the Bank of England. “There are some members of the Monetary Policy Committee against the idea, but it’s just a matter of timing about when they initiate that policy.”

Turkey’s central bank today cut its benchmark one-week repurchase rate by 25 basis points to 5.5 percent in its first such reduction since August 2011.

“Turkey has most of its remittances from Germany, so if German growth weakens, Turkey’s situation also weakens,” said James Reeve, an economist at Riyadh-based Samba Financial Group. (SAMBA)

Lira Gains

The Turkish lira strengthened 0.2 percent against the dollar at 1.7807 at 3:07 p.m. in Istanbul, as the bank cut the benchmark repurchase rate to spur economic growth and kept the overnight borrowing interest rate unchanged. The move was “less dovish than what the markets expected,” Luis Costa, an emerging market strategist at Citigroup in London, said in an e-mailed note.

Today’s actions follow in the wake of a reduction in economic forecasts by the Frankfurt-based ECB. Officials predicted the 17-nation region will contract 0.5 percent this year and 0.3 percent in 2013.

ECB President Mario Draghi still said yesterday that ECB policies and governance reforms in the euro area have revived confidence that will help foster a gradual economic recovery in the second half of next year.

‘Gradual Improvement’

“The impression that one has of this year, at least of the second part of this year, is of a gradual improvement in financing conditions which is one of the reasons why we foresee a beginning of a recovery in the second part of next year,” Draghi said in testimony at the European Parliament’s Economic and Monetary Affairs Committee in Brussels. Still, “the medium- term outlook for economic activity remains challenging.”

Unlike the central banks taking decisions today, the ECB, the U.S. Federal Reserve, the Bank of Japan and the Bank of England have recently focused more on unconventional policies to stimulate growth after already bringing down interest rates.

In the U.K., which sells about half of its exports to the euro region, the Bank of England kept its quantitative-easing target at 375 billion pounds ($608 billion) on Dec. 6 after halting bond purchases the previous month. Governor Mervyn King has left the door open to more stimulus if needed and the BOE is also trying to spur a recovery with a credit boosting plan.

“The central and eastern European central banks are really just following what’s happening in the U.S., Britain or Japan,” said Danske Bank’s Christensen. “They probably also feel more comfortable to act when everybody else is easing policy.”

To contact the reporter on this story: Craig Stirling in London at cstirling1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Andrew J. Barden at barden@bloomberg.net; Jonas Bergman at jbergman@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.