Riksbank Seen Keeping Rates on Hold as Krona Slide Aids Target

Sweden’s central bank probably won’t cut its main lending rate this week after a krona sell-off helped policy makers bring inflation closer to their target.

The six board members of the world’s oldest central bank will keep the repurchase rate at 1 percent for a third consecutive meeting. Policy makers meet today and publish their decision tomorrow at 9:30 a.m. in Stockholm. All but one of nineteen economists surveyed by Bloomberg predict no change, with a single forecast pointing to a cut to 0.75 percent.

“There are no really strong reasons to change the rate here and now,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm. “The outlook for the Swedish and international economy has improved and the krona weakened. Household debt continues to rise at a pretty rapid pace.”

The krona touched its lowest in a year against the euro last week after signals from the U.S. it may withdraw monetary stimulus prompted investors to exit less liquid markets. The sell-off reversed a surge in the Swedish currency that had threatened to undermine the Riksbank’s efforts to reach its 2 percent inflation target. Headline consumer prices fell in May for a second month.

Since then, a weaker krona and signs the export industry is recovering have given the central bank more scope to respond to signs of overheating elsewhere in the $500 billion economy.

Credit Growth

Swedish manufacturing has picked up and unemployment fallen after gross domestic product grew faster in the first quarter than most economists surveyed by Bloomberg estimated. At the same time, Swedish household borrowing has started to accelerate again after years of slowing, reviving concern at the central bank that private debt burdens may grow to unsustainable levels.

Regulators and the government have sought to cool credit growth by placing curbs on lending and requiring banks in the largest Nordic economy to hold more capital than their competitors elsewhere.

“Sweden stands, in relative terms, on a stronger footing than many others but there will surely be a relatively shifting climate in the economy also during the autumn,” Finance Minister Anders Borg said last month.

Swedish manufacturing and consumer confidence rose last month as household spending helped the Swedish economy grow an annual 1.7 percent in the first quarter. Manufacturing expanded at the fastest pace in two years and seasonally-adjusted unemployment fell to a 10-month low of 7.9 percent in May.

Lending to Swedish households picked up to 4.7 percent in May. Private debt as a share of disposable incomes will reach a record 177 percent by the end of 2014, the Riksbank predicts.

The Riksbank kept rates unchanged at its last meeting in April, citing improving economic growth prospects. Still, it pushed back the timing of a rate increase by about a year until late 2014 as weak demand and a strong currency earlier this year resulted in falling consumer prices in five of the seven months through May.

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