Sweden’s Riksbank Set to Cut Rates as Export Pain Deepens

Sweden’s central bank will probably cut its benchmark interest rate this week to keep the largest Nordic economy from sliding into a recession as Europe’s debt crisis buffets exports.

The Riksbank will lower its repo rate by a quarter of a percentage point to 1.5 percent, according to 13 of the 18 economists surveyed by Bloomberg. Five predicted no change. Policy makers at the Stockholm-based bank are meeting today and will announce their decision at 9:30 a.m. local time tomorrow.

“All the arguments are in place for a rate cut,” said Roger Josefsson, chief economist in Stockholm at Danske Bank A/S. “The momentum in the economic data is incredibly negative right now.”

Sweden’s trade surplus shrank to its narrowest in more than a year at the end of 2011 and manufacturing confidence hit a 28-month low in January as exporters endure the fallout of Europe’s debt crisis. The National Institute of Economic Research predicted in December that Sweden’s economy will stall, requiring rate cuts that will send the benchmark as low as 0.75 percent this year.

Halted Tightening

The krona was little changed at 8.7757 per euro, after strengthening 1.6 percent this year. Two-year yields rose two basis points to 1.06 percent as of 10:11 a.m. in Stockholm.

The central bank lowered rates in December for the first time in 2 1/2 years, after it scrapped a tightening cycle two months earlier to respond to weaker growth prospects. About half of Sweden’s $500 billion economy comes from exports, with about 55 percent going to Europe. The bank in December estimated gross domestic product will grow 1.3 percent this year, less than a third the 4.6 percent rate in 2011.

“Sweden is now clearly being pulled into the international deceleration,” Robert Bergqvist, chief economist at SEB AB, said in a report this week. The economy probably shrank 1 percent in the final three months of last year, in part due to a “sharp slowdown in exports,” and the Riksbank is likely to cut its main rate to 1 percent by July, he said.

Danske Bank estimates the Riksbank will cut the rate to 0.5 percent this year and predicts policy makers will resort to new liquidity measures to support financial markets, Josefsson said.

Futures Bet

Interest rates futures show traders expect the Riksbank will lower its rate to 1 percent by March 2013. That’s up from as low as 0.75 percent in December, when the European Central Bank announced it would provide unlimited three-year loans to European banks, easing credit concerns.

Futures on Sweden’s repo rate also indicate the Riksbank will cut its benchmark to 1.3 percent by September.

Inflation has lagged behind the central bank’s 2 percent target, giving policy makers extra scope to cut rates. Consumer price growth, adjusting for the impact of mortgage costs, eased to an annual 0.5 percent in December -- the lowest since May 2005 -- from 1.1 percent in November. Inflation adjusting for mortgage costs won’t reach the bank’s target until 2014, it said in December.

The Riksbank has predicted weaker exports and investment will hurt the labor market and warns unemployment will rise this year. Joblessness jumped to 7.1 percent in December from 6.7 percent in November, non-seasonally adjusted figures published by Statistics Sweden showed on Jan. 26.

Swedish companies have signaled they’ll adjust to the weaker outlook by capping price increases and trimming their workforces. A Feb. 8 Riksbank survey of 24 of Sweden’s biggest firms representing about 200,000 employees showed that “companies believe they will need to make further job cuts in the period ahead” as the “economic outlook is expected to deteriorate further in the next six months.”

Job Cuts Jump

A report yesterday from the Public Employment Service showed job cuts in January jumped to 6,664 from 2,609 a year earlier as companies let go of workers to combat slumping demand.

The central bank in neighboring Norway has also had to reverse last year’s tightening cycle and in December lowered its main rate by half a percentage point, its biggest such cut since May 2009. Policy makers in Oslo have signaled they’re willing to cut rates further to prevent krone gains that hurt exporters.

The currencies of Norway and Sweden have strengthened this year as official rates remain above those in the euro area and the U.S. Even after easing policy, the Norwegian and Swedish central banks’ main rates are higher than the 1 percent in the euro region and a target of zero to 0.25 percent in the U.S.

Sweden’s krona has strengthened 1.6 percent against the euro this year, while Norway’s krone is up 2.8 percent versus the single currency in the same period.

Sweden’s “krona may continue to appreciate despite Swedish economic stagnation,” Bergqvist said.

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