Riksbank Delays Rate Rise Until Late 2014 Amid Krona SurgeJohan Carlstrom
Sweden’s central bank left its benchmark interest rate unchanged for a second meeting and delayed tightening to the second half of 2014 after the surging krona brought inflation to standstill.
The Riksbank’s six-member board voted 4-2 to keep the repo rate at 1 percent after lowering it four times since December 2011, according to a statement on its website today. The decision was predicted by all of the 21 economists surveyed by Bloomberg. The bank reduced its forecast for the rate to 0.9 percent for the first quarter next year from a previous assessment of 1.2 percent.
“The repo rate needs to remain at a low level for a longer period of time to support the recovery to ensure that inflation rises towards the target,” the Riksbank said in a statement. “Increases in the repo rate are not expected to begin until the second half of 2014.”
The bank’s rate policy has been criticized by Sweden’s export industry and even by members of its own executive board. Deputy Governor Lars E.O. Svensson, who advocated for a half point cut today, said last month the bank’s record on inflation targeting was “poor” as price growth lags well behind its 2 percent goal. Headline inflation reached zero in March, after prices fell an annual 0.2 percent in February.
The krona slid 1 percent to 8.4643 per euro as of 10:04 a.m. in Stockholm. Sweden’s two-year yield slid five basis points to 0.91 percent.
“It was a wise choice,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm. “There has been a big focus on the krona and as recently as today we’ve received a number of company results that indicate that the krona is eating into profit margins so from that perspective it’s a reasonable move.”
Central bankers from New Zealand to Norway have moved to weaken their currencies and protect exporters. Swedish policy makers, including Prime Minister Fredrik Reinfeldt, had so far taken a hands-off approach on the krona, which is up 7 percent over the past 12 months in a Bloomberg correlation-weighted index of 10 currencies.
Governor Stefan Ingves, who is also chairman of the Basel Committee on Banking Supervision, has warned that keeping rates too low too long will fuel private debt growth, already at a record high. The central bank estimates household debt will reach more than 174 percent of disposable incomes this year.
“There is a genuine worry rate cuts could raise household debt even higher,” Robert Bergqvist, chief economist at SEB AB in Stockholm who used to work at the Riksbank, said before the decision. “The outlook for the Swedish economy hasn’t really changed much since the last rate meeting so there is no strong reason to cut.”
Finance Minister Anders Borg this week cut his forecast for economic growth in 2014 to 2.2 percent from a December estimate for 3 percent, citing among other things the fallout of the strong krona on exports. Gross domestic product will expand 1.2 percent this year, his ministry estimates.
Sweden sells about half of its economic output abroad, with 70 percent of exports destined for Europe. Borg, who predicted budget deficits for this year and next, said the crisis in the euro zone is hurting Sweden’s recovery. His ministry estimates unemployment will reach 8.4 percent next year, the highest rate in Scandinavia.
The Riksbank today forecast that the economy will expand 1.4 percent this year, up from a previous assessment of 1.2 percent, and 2.7 percent next year. Unemployment will be 8.2 percent this year and decline to 7.8 percent next year.
Exporters, including Europe’s biggest paper-tissue maker Svenska Cellulosa AB, have urged the Riksbank to cut rates. The krona’s appreciation will lead to plant closures and companies moving production abroad, Sverker Martin-Loef, chairman of Industrivaerden AB, told Svenska Dagbladet in an April 3 interview. Industrivaerden holds stakes in companies including Ericsson AB, the world’s largest maker of mobile phone networks, and Sandvik AB, the biggest maker of metal-cutting tools.
The sluggish recovery outlook has prompted a number of economists to question the Riksbank’s policy. Citigroup Inc. and Nordea Bank AB both say Ingves should cut rates by a quarter point to support the labor market and fuel inflation.
“They should be cutting,” John Zhu, a London-based economist at HSBC Plc, said in a phone interview yesterday. “The upside risk to unemployment, downside risk to inflation and also the very strong performance of the currency will keep inflation low but also possibly hurt exports.”