Riksbank Keeps Rate at 1% as Krona Slump Helps Price Target
Sweden’s central bank kept its main interest rate unchanged and stuck to a forecast for tightening to start in the second half of next year after a krona sell-off helped bring inflation closer to target.
The repurchasing rate was kept at 1 percent for a third consecutive meeting, the Stockholm-based bank said today in a statement. The decision was forecast by 18 of the 19 economists surveyed by Bloomberg, with one predicting a cut. The bank said it sees the rate at an average of 1 percent in the third quarter and 0.9 percent in the fourth quarter, maintaining a small chance for a reduction.
“The repo rate needs to remain low to support the economy and enable inflation to rise to the target of 2 percent,” the bank said in a statement. “Gradual increases in the repo rate are expected to begin during the second half of 2014, as assessed earlier.”
Sweden’s $540 billion economy, home to Ericsson AB and Electrolux AB, is starting to recover from last year’s export-induced slump. Manufacturing has picked up and unemployment fallen after the economy grew more than predicted in the first quarter. Low rates have also helped fuel faster borrowing, reigniting concerns over financial imbalances as debt grows.
The krona pared losses after the decision, and traded little changed at 8.7322 per euro as of 10:47 a.m. in Stockholm.
“There’s no reason to cut the rate right now given that households are faring relatively well,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm. The Riksbank is right to take the household debt situation “seriously” and will probably not cut rates further, he said.
Two of the bank’s six board members, deputy governors Karolina Ekholm and Martin Floden, voted for a cut to 0.75 percent and argued that the Riksbank should not start raising the rate until the second half of next year.
“The most surprising thing about today’s rate decision was that new board member Floden already now, together with Karolina Ekholm, chose to oppose the cut,” Anna Raman, an analyst at Nykredit Bank A/S, said in a note to clients. Like Lars E.O. Svensson, who stepped down in May after unsuccessful calls for more rate cuts, Floden argued “that a lower repo rate path would produce a forecast where inflation more quickly reaches the target,” she said.
The Riksbank raised its unemployment forecast for next year to 8.1 percent from 7.8 percent, even as it predicted growth will accelerate to 1.5 percent this year and 2.8 percent next year, raising earlier forecasts. Consumer prices will rise 0.1 percent this year, 1.3 percent in 2014 and 2.6 percent in 2015, the bank forecast.
“The Swedish economy is on the way to a recovery,” the Riksbank said today. “Households’ finances are relatively strong. Low interest rates and rising employment have contributed to good growth in incomes preparing the ground for continued steady growth in consumption.”
The krona has lost 4.5 against the euro since the Riksbank’s April meeting, helping policy makers bring inflation back toward the 2 percent target and boosting exports. The Riksbank has cut the rate four times in the year through December 2012 to foster growth in the economy, which relies on exports for about half of its output.
The Riksbank repo rate forecast “still indicates a 24 percent likelihood of a cut in the coming quarters and a first increase during the second half 2014,” Raman said. “Thereafter it indicates slightly quicker increases than before.”
The krona appreciated 31 percent against the euro from the end of 2008 through the middle of March this year as investors poured funds into Sweden’s AAA rated bonds backed by one of Europe’s lowest public debt burdens.
Since then, investors have sought to exit their krona holdings as liquidity replaces public finance health as a driver of capital flows following signals from the U.S. Federal Reserve that it’s preparing to scale back stimulus.
Prime Minister Fredrik Reinfeldt said in an interview last week that his government is watching the exchange rate to see whether the weaker krona level “has come to stay,” adding the decline has helped Swedish exporters.
The Riksbank today cited improving economic growth prospects. In April, it pushed back the timing of a rate increase by about a year until late 2014 as weak demand and a strong currency resulted in falling consumer prices in five of the seven months through May.
Fiscal policy is also supporting the recovery, easing pressure to cut rates. Finance Minister Anders Borg said last month that the government is working to continue to cut taxes for low- and middle-income earners to help the economy and stimulate the labor market.
“Sweden stands, in relative terms, on a stronger footing than many others but there will surely be a relatively shifting climate in the economy also during the autumn,” Borg said.
Swedish manufacturing and consumer confidence rose last month as household spending helped the economy grow an annual 1.7 percent in the first quarter. Manufacturing expanded the most in two years and seasonally-adjusted unemployment fell to a 10-month low of 7.9 percent in May, reports showed.
The improved conditions for consumers have added to credit growth. Lending to Swedish households picked up to 4.7 percent in May. Private debt as a share of disposable incomes will almost double to a record 176 percent by the end of 2014 as house prices hover around all-time highs, the Riksbank predicts.
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