Riksbank Cuts Rates as Krona Surge Threatens Export Growth

Riksbank Cuts Rates as Krona Surge Threatens Export Growth
The headquarters of Sweden's Riksbank stand in Stockholm. Photographer: Casper Hedberg/Bloomberg

Sweden’s Riksbank cut its benchmark interest rate for the first time since February, caving in to calls from exporters, as the krona’s strength and deepening euro crisis threaten the nation’s trade competitiveness.

The repo rate was cut by a quarter point to 1.25 percent, the Stockholm-based bank said today. The move was predicted by six of the 22 economists surveyed by Bloomberg, while the remainder forecast no change. The bank said the rate is expected to remain unchanged “until the middle of next year.”

“During the summer the krona has appreciated faster than expected and productivity has also been unexpectedly high,” the Riksbank said. “Inflationary pressures are therefore expected to be lower than was forecast in July.”

The bank has cut rates three times since December to protect the largest Nordic economy against sagging euro-area demand as leaders in the bloc struggle to contain the debt crisis. Riksbank policy makers have come under pressure from exporters such as Svenska Cellulosa AB and trade unions to curb krona gains after the currency soared to a 12-year high against the euro last month, plunging manufacturing into decline.

The European Central Bank kept its benchmark rate at a record low of 0.75 percent today, as predicted by 28 of 58 economists in a Bloomberg survey. The remainder forecast a quarter-point cut.

Deeper Cuts

The krona declined 0.3 percent at 8.5090 against the euro as of 1:50 p.m. in Stockholm. Against the dollar, the krona weakened 0.1 percent to 6.7359.

Two of the bank’s six member board, Lars E. O. Svensson and Karolina Ekholm, wanted to reduce rates to 1 percent, according to today’s statement.

The rate cut “is needed since we’re heading toward a significant economic downturn, even recession,” said Par Magnusson, chief economist at Royal Bank of Scotland Plc in Stockholm. “There will be more cuts” to 0.75 percent this year and 0.5 percent in 2013 in a best-case scenario, he said.

The Riksbank said it now expects its repo rate to average 1.4 percent in the third quarter next year, versus a July forecast for 1.6 percent, and that it will rise to an average 2.2 percent a year later, down from a 2.4 percent forecast.

Inflation Slows

Consumer prices will rise 1.2 percent this year and 1.3 percent in 2013, down from a 1.7 percent forecast, the Riksbank said. Unemployment will rise to an average 7.6 percent this year and stay at that level in 2013, the bank said. The economy will grow 1.5 percent this year and 1.9 percent in 2013, it said.

Some of Sweden’s biggest industrial companies including Svenska Cellulosa and Holmen AB have urged the Riksbank to lower rates to cool haven demand for the country’s currency. Bets on a rate cut also grew this week after a survey showed the manufacturing industry shrank in August at the fastest pace in 3 1/2 years, as export orders declined.

“The bank’s forecast for GDP growth next year is too optimistic” and “if our assumption that the euro-zone debt crisis worsens proves correct, the krona is likely to continue to appreciate, reducing inflationary pressures further,” Ben May, an economist at Capital Economics in London, said in a client note. “We are sticking with our view that interest rates will fall to just 0.5 percent next year.”

Unproven Effect

Governor Stefan Ingves has previously said that the bank shouldn’t use monetary policy to steer the krona, arguing rate differentials have an unproven effect on exchange rates. Policy makers also backtracked on July signals for an unchanged rate for “just over a year.”

The krona has strengthened about 8 percent against the euro since a low on May 17, making it the best-performing major currency in the period. It has gained more than 20 percent against the euro in the past three years.

Krona gains are helping to keep consumer-price growth below the central bank’s 2 percent target. Headline inflation slowed to 0.7 percent in July, the lowest in more than two years, from 1 percent the previous month, Statistics Sweden estimates.

The currency’s appreciation creates “challenges,” Prime Minister Fredrik Reinfeldt told reporters in Kiruna, northern Sweden, yesterday. The premier earlier this week said the strong krona is here to stay, while Bo Lundgren, the head of Sweden’s National Debt Office, said the country may remain a haven from Europe’s crisis “for a long time.”

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