Riksbank Should Mull Cutting Key Rate to 0.25%, NIER Head Says

Sweden’s central bank should consider cutting its main lending rate next year to the record lows seen after the collapse of Lehman Brothers Holding Inc., said Mats Dillen, director-general at the Swedish National Institute of Economic Research.

The Riksbank probably has room to gradually lower the repo rate to 0.25 percent from 1 percent in 2013 to stimulate demand as inflation is below target and household debt concerns are overblown, Dillen said today in Stockholm.

“It’s natural for the Riksbank to take the biggest responsibility at this stage to stabilize the economy since they’re quite some way from the inflation target and growth is weak,” he said. Household debt “won’t rise much in coming years. It’s not something we see as a big problem,” he said.

The Riksbank yesterday forecast no more cuts after lowering its main lending rate for a fourth time in a year as Governor Stefan Ingves said consumer sentiment has weakened and exports are suffering from slumping European demand. Two of the bank’s six board members argued for cuts next year to 0.75 percent and 0.5 percent, respectively.

NIER today forecast the Riksbank will only lower rates to 0.75 percent in 2013, as gross domestic product growth slows to 0.9 percent this year and 0.8 percent in 2013. Headline inflation won’t return to the 2 percent target until 2015, after abating to 0.4 percent next year from 0.9 percent in 2012, NIER said.

GDP Contraction

The first quarter “will be very weak with a risk of a GDP contraction,” Dillen said. “Sentiment among households and companies is much weaker than normal,” and “we have a very high unemployment,” he said.

A report today showed Swedish consumer confidence fell for a fifth month, slumping to the lowest since April 2009.

The consumer confidence index fell to minus 12.2 from a minus 7.3 the previous month, the NIER said. The manufacturing confidence index rose to minus 15 from a revised minus 17. It was estimated at minus 19.

Sweden’s export-reliant economy will contract a quarterly 0.5 percent in the last three months of this year, NIER forecast today. Unemployment will rise to an average 8.3 percent next year from 7.7 percent in 2012, according to NIER.

Abating growth has meant private borrowing growth has slowed in all but one of the last 25 months after household debt hit a record 173 percent of disposable incomes this year compared with 90 percent in the mid-1990s as Swedes financed finance rising property prices. It will stay largely unchanged at 174 percent next year if the central bank sticks to its forecast of no more rate cuts, the Riksbank said yesterday.

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 in Oslo at jbergman@bloomberg.net

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