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Riksbank Cuts Repo Rate as Euro Crisis Weighs on Sweden

Riksbank Cuts Key Rate as Sweden Falls Victim to Euro Crisis
A flag flies outside the headquarters of the Riksbank, Sweden's central bank, in Stockholm, Sweden. Photographer: Casper Hedberg/Bloomberg

Dec. 18 (Bloomberg) -- Sweden’s central bank reduced its benchmark interest rate for a fourth time in a year to revive growth as the largest Nordic economy succumbs to Europe’s debt crisis.

The repo rate was lowered by a quarter of a percentage point to 1 percent, the Stockholm-based Riksbank said in a statement today. The bank signaled it will probably keep the benchmark unchanged until the end of next year.

“They did the right thing,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm. “There is a slight, slight chance of another cut” next year as “it’s going to be a tough winter,” he said.

Sweden’s $540 billion economy, which relies on exports for about half its output, is struggling to expand as the debt crisis in Europe erodes demand for its goods and services. Ericsson AB, the world’s largest maker of mobile phone networks, and truck maker Volvo AB, are among Swedish companies cutting thousands of jobs in response to shrinking markets, unsettling consumers in the Nordic economy.

“Both growth and inflation will be slow in the course of 2013,” as Swedish consumer sentiment has weakened and exports will be hit by weaker European demand, Riksbank Governor Stefan Ingves said today in an interview.

Krona Gains

The bank said it expects the rate to be at 1.1 percent in a year, versus an October forecast of 1.3 percent. It sees the rate at 1.8 percent by the end of 2014. The economy will expand 1.2 percent next year, compared with an October forecast of 1.8 percent. Its prediction for 2014 growth was unchanged at 2.7 percent, while it sees inflation at only 0.3 percent next year, far below its 2 percent target.

The krona strengthened 0.3 percent to 8.7377 per euro as of 1:13 p.m. in Stockholm. Swedish two-year yields rose one basis point to 0.74 percent.

The krona is trading at a “pretty reasonable level,” Ingves said at a press conference.

Two of the bank’s six board members, Karolina Ekholm and Lars E.O. Svensson, entered reservations against the rate forecast, advocating a trough of 0.75 percentage point and 0.5 percentage point, respectively. Svensson also wanted to lower the benchmark to 0.75 percent today.

Unemployment Gains

“There’s room for the Riksbank to lower all the way down to 0.5 percent” next year, Robert Bergqvist, chief economist at SEB AB and former head of research at the central bank, said before the decision. “We have a too high unemployment and that normally leads to a continued downward pressure on wages,” so “inflation risks are very limited,” he said.

Swedish unemployment will probably continue to rise as faltering demand from abroad hurts growth, Finance Minister Anders Borg said on Dec. 14. The seasonally-adjusted jobless rate rose to 8.1 percent in November, the highest in two years.

Slowing growth and a stronger krona have kept headline inflation below target all year, while consumer prices fell in November, the first annual decline in the gauge in three years. Swedish manufacturing confidence slid to a three-year low last month and consumer confidence matched its lowest level in a year as economic growth slowed to an annual 0.7 percent in the third quarter, from 1.3 percent in the previous three months.

Debt Risk

Riksbank Governor Stefan Ingves said on Dec. 4 economic developments in Sweden and abroad, unemployment and inflation are what “primarily steer” rate decisions, even though policy makers “can’t completely disregard” household debt.

“The risks entailed in households’ high level of indebtedness remain, but given the weaker economic activity and lower inflation,” the board agreed a lower rate was needed, the bank said today.

Household debt has risen to 173 percent of disposable incomes this year from 90 percent in the mid-1990s. Still, the credit boom is showing signs of abating after household borrowing growth slowed in all but one of the last 25 months, reaching an annual 4.5 percent.

“I don’t see how a rate cut could pave the way for increased financial instability,” Bergqvist said. “Credit growth is slowing.”

-- With assistance by Joel Rinneby in Stockholm, Editors: Jonas Bergman, Tasneem Brogger

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

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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