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Riksbank Keeps Rate on Hold, Repeats Tightening Path

Sweden’s Riksbank kept its benchmark rate at a record low and repeated plans to put off tightening until July at the earliest after the government cut the economic growth outlook and said more stimulus was needed.

The Stockholm-based central bank kept the seven-day repo rate at 0.25 percent and reiterated a forecast that it won’t raise the rate until “summer or early autumn,” according to a press release on its Web site today. The rate decision was expected by all 19 economists surveyed by Bloomberg.

“We have yet to see the turnaround in exports that we’re hoping for going forward,” First Deputy Governor Svante Oeberg said at a press conference in Stockholm today. “We will raise the rate gradually as the economy recovers.”

Sweden’s export-reliant economy will grow less than previously estimated this year, the government said on April 15, cutting its forecast half a point to 2.5 percent. The Nordic country slipped back into a recession in the third quarter, and slowing export growth and a decline in retail sales in February may be indications that the recovery could be subdued.

“The Swedish economy is growing this year and the labor market has turned around,” Oeberg said. “Exports will pick up because we’ve seen positive order intake figures.”

The krona gained 0.4 percent against the euro to trade at 9.6346 at 12:47 a.m. in Stockholm. Against the dollar, the krona rose 0.6 percent to 7.1325.

Faster Recovery?

“We think the economy is turning quicker than the Riksbank,” said Annika Winsth, chief economist at Nordea Bank AB in Stockholm. The bank will raise the rate in July and bring it to 1.75 percent by the end of the year, she estimates.

The Riksbank, which announces its rate decision a day after holding a policy meeting, has kept the benchmark at a record low since July. Policy makers at the last meeting in February brought forward the timing of rate increases from “autumn,” and said then the recovery “rests on significantly more solid ground.”

Since then, fourth-quarter GDP data published on March 1 showed a 0.6 percent contraction in the final three months of the year, when economists surveyed by Bloomberg had expected 0.3 percent growth. Industrial production fell 0.8 percent in February, when economists in a Bloomberg survey had predicted a 0.8 percent increase.

Economic Forecasts

The bank lowered its outlook for GDP growth this year to 2.2 percent from 2.5 percent previously. Economic output will expand 3.7 percent in 2011 and 3.1 percent in 2012, it estimates. The repo rate will average 0.4 percent this year, 1.8 percent in 2011 and 3.3 percent in 2012, the bank said.

The bank lowered its estimate for unemployment this year to an average of 9 percent, from 9.4 percent previously. The jobless rate will fall to 8.8 percent in 2011, it forecast.

“The Riksbank’s assessment is that it is appropriate to begin normalizing monetary policy during the second half of 2010,” it said in the statement. Deputy Governor Lars E.O. Svensson was the only policy makers of the five board members at the meeting to enter a reservation against the repo rate path, arguing that the rate should stay at 0.25 percent through the fourth quarter.

The Riksbank also said it will cease to offer loans at maturities of three and six months, “but will replace these with variable-rate loans at a maturity of 28 days.”

The bank last year issued 295 billion kronor ($41 billion) in fixed-rate loans to channel liquidity into the economy.

House Prices

The government of Prime Minister Fredrik Reinfeldt, which faces an election in September, has pledged to spend a further 4.9 billion kronor on infrastructure, family benefits and jobs, taking this year’s total stimulus to about 37 billion kronor, or 1.2 percent of gross domestic product.

At the same time, record-low borrowing costs have fueled a surge in house prices, even as unemployment rose and the economy continued to contract. Residential property prices rose for an 11th quarter in the three months ended March to increase an annual 9 percent, the statistics office said on April 15. Household credit has also continued to rise, with growth accelerating to an annual 9.3 percent in February.

Riksbank Governor Stefan Ingves said in an April 16 interview that “increased household debt can’t go on forever; the same thing for house prices.” The current rate of house price inflation is a “concern,” he said. Ingves didn’t participate in yesterday’s rate meeting because disruptions caused by volcanic ash prevented him from flying out of Madrid after a meeting of European Union finance and central chiefs.


The Riksbank’s decision to stay on hold also comes after annual consumer price rises have lagged behind the bank’s forecasts for the last three months. Inflation was 1.2 percent in March compared with a central bank prediction for 1.3 percent. The bank targets 2 percent inflation.

Inflation will average 1.1 percent this year, lower than the bank’s previous forecast for 1.6 percent. Price growth will average 2.1 percent in 2011 and 2.9 percent in 2012, the bank said, also lowering its earlier estimates.

Low rates will be welcomed by Sweden’s manufacturers. Companies including Ericsson AB, the world’s largest maker of mobile-phone networks, and truck maker Volvo AB have cut thousands of jobs since the outbreak of the financial crisis to cope with lower demand as the country’s output fell 4.9 percent last year, the most since World War II.

The lack of export-led growth has prompted the government to rely on domestic stimulus to boost the economy. On top of extra spending measures, Reinfeldt’s government this year cut income taxes for a fourth time since coming to power in 2006.

The government trails the opposition in most polls, and was running 3.5 percentage points behind in a survey published by pollster Skop on April 15.

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