Sweden May Shift to Crisis Mode, Reverse Interest Rate Rises

Oct. 26 (Bloomberg) -- Sweden’s central bank may abandon plans to raise interest rates and even signal it’s prepared to ease policy as it resorts to crisis mode in response to Europe’s debt woes.

The Riksbank will tomorrow keep its benchmark seven-day repo rate unchanged at 2 percent for a second meeting since July, all 27 economists surveyed by Bloomberg predict. The bank may also scrap a plan to raise its rate to about 2.75 percent by early 2013 as pressure to ease policy grows, economists said.

“They will cut the rate to 1 percent in the next year” and won’t raise it again until 2013, said Par Magnusson, chief economist at Royal Bank of Scotland Plc in Stockholm. “Consumption in Sweden has come to a complete halt. There’s no inflation pressure and industry is facing a slowing economy.”

Policy makers at the Riksbank in September halted a cycle of seven increases since July last year and cut a forecast for more tightening amid “considerable uncertainty.” Leaders in Europe are struggling to contain a debt crisis that started in Greece and threatens to engulf the whole region. Sweden relies on exports to generate half its economic output, with half of its sales abroad going to the European Union.

The largest Nordic economy, which is home to wireless network maker Ericsson AB and clothes retailer Hennes & Mauritz AB, will grow only 1.3 percent next year, the government estimated in September. It had previously forecast 3.8 percent expansion. Output grew 5.7 percent in 2010.

‘Negative Ramifications’

“As global growth, and especially European growth slows, this will have negative ramifications on the Swedish economy,” said Elga Bartsch, chief European economist at Morgan Stanley in London, in a note. The New York-based bank expects the Riksbank to keep the repo rate unchanged until the end of 2012, she said.

A TNS Sifo Prospera survey commissioned by the Riksbank showed this month that Swedish money market investors and traders expect rates to be unchanged over the next 12 months and rise to 2.3 percent over the next 24 months. The Riksbank in September forecast a rate of 2.4 percent in the third quarter next year and 3 percent in two years.

Central banks around the world have returned to crisis mode, reducing the scope of Swedish policy makers to increase rates. The U.S. Federal Reserve has said it will probably keep its rate near zero until mid-2013 while the European Central Bank has signaled it may cut rates to stave off a recession.

Euro Summit

All 27 European Union leaders start a summit on the debt crisis 6 p.m. tonight, followed by a meeting of euro area’s leaders. The gathering is seeking to decide on the shape of Greece’s second bailout plan, the recapitalization of banks and how to retool the euro area’s 440 billion-euro ($612 billion) rescue fund into a more forceful backstop.

“There’s room for the ECB to cut interest rates for macroeconomic reasons,” said Robert Bergqvist, chief economist at SEB AB in Stockholm. “That would increase pressure on the Riksbank primarily to keep the rate unchanged but maybe also to cut the rate,” mainly to avoid strengthening the krona and hurting exporters, he said. SEB predicts Swedish rates won’t rise over the next two years.

The krona has rallied in the past month after weakening from more than a 10-year high against the euro and a three year-high versus the dollar earlier in the year. Since Sept. 23, the currency has risen 2.7 percent to 9.1109 per euro and 5.5 percent against the dollar to 6.5522.

The krona gained 0.4 percent against both the euro and the dollar as of 1:02 p.m. in Stockholm, making it today’s best-performing major currency.

Krona Moves

“If the krona falls to a level around 8.90 against the euro and stays there for some time and at the same time keeps today’s level against the dollar, then I think that will be sufficient reason to lower the rate,” Bergqvist said.

Slowing inflation and the prospect of falling house prices are also taking pressure off Swedish policy makers. Underlying inflation, which strips out interest rate changes, has been below the Riksbank’s 2 percent target all year and slowed to 1.5 percent in September. Some 67 percent of Swedes expect house prices to fall or stay unchanged over the next 12 months, a survey by SEB released this month showed.

The government last month abandoned an income tax cut planned for 2012 to safeguard public finances. Prime Minister Fredrik Reinfeldt’s ruling coalition expects a balanced budget next year and a 0.1 percent surplus this year.

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

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.