Sweden’s Riksbank Keeps Key Interest Rate at 1.5%

Sweden Keeps Key Interest Rate at 1.5%, Recession Risks Ease
The headquarters of Sweden's central bank stand in Stockholm. Photographer: Casper Hedberg/Bloomberg

Sweden’s Riksbank kept its main interest rate unchanged amid signs the largest Nordic economy will avoid a recession after policy makers across Europe stepped in to ease debt crisis concerns.

The repo rate was kept at 1.5 percent, after two cuts since December, the Stockholm-based bank said today. The move was predicted by 14 of 18 economists surveyed by Bloomberg. Four forecast a quarter point cut. The central bank repeated its intention to keep rates unchanged over the next year.

“Following the sharp slowdown in the Swedish economy towards the end of last year, it is now possible to discern some positive signs,” the bank said. “At the same time, inflation is low and expected to remain so over the coming year. Monetary policy needs to remain expansionary to support the recovery.”

A rebound in Swedish exports, rising retail sales and improving consumer confidence has brought the economy back from the “abyss,” Finance Minister Anders Borg said this week. The economy may avoid a recession as growth slows to 0.4 percent this year from 3.9 percent in 2011, sending the budget into a deficit, according to the finance minister.

Yields Jump

The krona strengthened 0.3 percent to 8.8569 per euro and 0.03 percent to 6.7680 per dollar as of 11:26 a.m. in Stockholm. The yield on the two-year note rose eight basis points to 1.196 percent.

Half of Sweden’s output comes from exports, while 70 percent of that goes to Europe. The economy shrank 1.1 percent in the fourth quarter, its first contraction since 2009.

“The world economy seems to be facing brighter times and, if that proves to be correct, the Swedish economy can turn around quite quickly,” said Mikael Nilsson, an economist at Barclays Capital Plc. The Riksbank won’t cut rates more and will raise faster than forecast starting next year, he said.

The European Central Bank flooded financial markets with 1 trillion euros ($1.3 trillion) of cheap loans for three years, a facility known as the longer-term refinancing operation. There were renewed concerns this month as Spain has struggled with rising debt yields and doubts over deficits.

The Riksbank today cut its economic growth forecast to 0.4 percent this year from 0.7 percent and to 1.9 percent in 2013 from 2.1 percent. Inflation will average 1.2 percent this year and 1.9 percent in 2013 and unemployment will rise to an average 7.7 percent 2012 from 7.5 percent in 2011, it said. The bank targets inflation of 2 percent.

Rate Bets Fade

Swedish retail sales rose more than predicted in the first two months of the year, while consumer and manufacturing confidence improved for a third month in March.

Traders and investors scaled back predictions for rate cuts this year. Futures show traders expect the Riksbank will lower its rate to 1.30 percent in December, up seven basis points from yesterday and from as low as 0.75 percent in December.

Sweden’s benchmark OMX stock index has risen 6 percent this year, paring some of last year’s 14 percent loss.

Swedish growth will pick up to 3.3 percent next year, Borg predicted this week. Unemployment will average 7.8 percent this year and 7.7 percent in 2013, according to the government.

Two of six Riksbank board members, Lars E.O. Svensson and Karolina Ekholm, argued for a cut to 1 percent today as inflation lags behind estimates. The two also advocated larger rate cuts at the past two meetings, and were the only two board members to call for lower rates in October.

Inflation has trailed the central bank’s forecasts in the first three months of the year. Consumer price growth eased for a sixth month out of seven to an annual 1.5 percent in March.

The low cost pressure and worsening labor market will force the Riksbank to cut rates at its next meeting in July, said Annika Winsth, chief economist at Nordea Bank AB.

“We’re still slightly more pessimistic than the Riksbank when it comes to growth and also the labor market, and historically rising unemployment has prompted the Riksbank to cut rates,” she said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE