Riksbank Cuts Repo Rate as Euro Crisis Weighs on Sweden

Photographer: Casper Hedberg/Bloomberg

A flag flies outside the headquarters of the Riksbank, Sweden's central bank, in Stockholm, Sweden. Close

A flag flies outside the headquarters of the Riksbank, Sweden's central bank, in Stockholm, Sweden.

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Photographer: Casper Hedberg/Bloomberg

A flag flies outside the headquarters of the Riksbank, Sweden's central bank, in Stockholm, Sweden.

Sweden’s central bank reduced its benchmark interest rate for a fourth time in a year to revive growth as the largest Nordic economy succumbs to Europe’s debt crisis.

The repo rate was lowered by a quarter of a percentage point to 1 percent, the fourth cut since December last year, the Stockholm-based Riksbank said in a statement today. The move was predicted by all but one of 17 economists surveyed by Bloomberg. The bank said it expects the rate to be at 1.1 percent in a year, versus an October forecast of 1.3 percent.

“The weak developments in the euro area are clearly affecting the Swedish economy, which is now slowing down,” the Riksbank said. “Household consumption is weak, unemployment is rising and inflationary pressures are low.”

Sweden’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. Ericsson AB (ERICB), the world’s largest maker of mobile phone networks, and truck maker Volvo AB, are among Swedish companies cutting thousands of jobs in response to shrinking markets, unsettling consumers in the largest Nordic economy.

The krona strengthened 0.2 percent to 8.7442 per euro as of 9:38 a.m. in Stockholm after the bank signaled it will not lower rates further next year. Swedish two-year yields were little changed at 0.73 percent.

“There’s room for the Riksbank to lower all the way down to 0.5 percent” next year, Robert Bergqvist, chief economist at SEB AB and former head of research at the central bank, said before the decision. “We have a too high unemployment and that normally leads to a continued downward pressure on wages,” so “inflation risks are very limited,” he said.

Swedish unemployment will probably continue to rise as faltering demand from abroad hurts growth, Finance Minister Anders Borg said on Dec. 14. The seasonally-adjusted jobless rate rose to 8.1 percent in November, the highest in two years.

Deflation Risk

Slowing growth and a stronger krona have kept headline inflation below target all year, while consumer prices fell in November, the first annual decline in the gauge in three years. Swedish manufacturing confidence slid to a three-year low last month and consumer confidence matched its lowest level in a year as economic growth slowed to an annual 0.7 percent in the third quarter, from 1.3 percent in the previous three months.

Riksbank Governor Stefan Ingves said on Dec. 4 economic developments in Sweden and abroad, unemployment and inflation are what “primarily steer” rate decisions, even though policy makers “can’t completely disregard” household debt.

“The risks entailed in households’ high level of indebtedness remain, but given the weaker economic activity and lower inflation,” the board agreed a lower rate was needed, the bank said today.

Household debt has risen to 173 percent of disposable incomes this year from 90 percent in the mid-1990s. Still, the credit boom is showing signs of abating after household borrowing growth slowed in all but one of the last 25 months, reaching an annual 4.5 percent.

“I don’t see how a rate cut could pave the way for increased financial instability,” Bergqvist said. “Credit growth is slowing.”

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

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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