Riksbank Signals More Easing in 2012 as Expansion Slows

Sweden’s Riksbank kept benchmark interest rates unchanged at their lowest level since early 2011 and said further easing has become more probable as growth slows in the largest Nordic economy.

The repo rate was kept at 1.25 percent, the Stockholm-based bank said in a statement today. The move was predicted by 16 of the 19 economists surveyed by Bloomberg, while the remainder forecast a cut to 1 percent. The bank lowered its forecast for the repo rate to an average 1.2 percent in the fourth quarter, down from a 1.3 percent forecast in September.

“It’s now more probable that the repo rate will be cut rather than being raised during the winter,” the bank said. “Compared with the assessment in September, the repo rate is expected to be raised at a later stage and at a slower pace.”

Policy makers in Stockholm have cut rates three times since December to protect the largest Nordic economy from job losses as Europe’s debt crisis undermines demand for exports. Yet Governor Stefan Ingves said last week there are risks associated with keeping rates too low and argued that there’s reason to be concerned about imbalances fueled by credit growth.

The krona declined 0.1 percent to 8.6768 per euro as of 10:22 a.m. It traded as much as 0.5 percent higher against the common currency before the decision.

Policy Mistake

Keeping rates unchanged today is “a policy mistake,” said Michael Bostroem, chief analyst at Danske bank A/S in Stockholm. “Apart from 2008, 2009 it’s hard to see a point where macro data so clearly has indicated that there are reasons to cut the rate, but I guess it comes down to the discussion that has been put forward about households’ indebtedness that impedes things.”

Swedish household borrowing growth picked up for the first time in nearly two years in August, even as economic growth slowed in the second quarter and seasonally-adjusted unemployment rose 7.8 percent last month. Apartment prices have risen more than 30 percent since 2007 following a boom in the credit supply. Household debt has swelled to more than 170 percent of disposable incomes, from 90 percent in the mid-1990s.

Shown Resilience

“The Swedish economy has so far shown resilience to the debt crisis in Europe, but now Swedish exports are being clearly damped by the weak activity in the euro area,” the Riksbank said. “However, the consequences for the economy as a whole are alleviated by households having relatively good purchasing power. All in all, the Swedish economy is expected to develop in the coming period largely as the Riksbank had forecast.”

Two of the Riksbank’s six policy makers, deputy governors Karolina Ekholm and Lars E.O. Svensson, argued for a rate cut. Ekholm wanted to cut rates to 1 percent while Svensson called for a reduction to 0.75 percent.

Economists and trade unions have argued in favor of rate cuts as Sweden’s $500 billion economy suffers slowing demand for its exports, which account for about half of its output. Growth in Sweden was an annual 1.3 percent in the second quarter, compared with an average of 4.3 percent since the start of 2010. Headline inflation has also stayed below the Riksbank’s 2 percent target all year, slowing to 0.4 percent last month.

Swedish manufacturing confidence fell to its lowest level in three years in October, the National Institute of Economic Research said yesterday. Paper maker Stora Enso Oyj this week became the latest company to cut jobs, following similar announcements by truck maker Volvo AB and phone company TeliaSonera AB.

“Today’s signal from the lowered rate path supports our forecast of a rate cut by 25 basis points in December,” said Andreas Jonsson, an analyst at Nordea Bank AB in Stockholm, in a note. “In our view it is a done deal.”

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