Riksbank Holds Key Rate at 1% as Recovery Gathers Pace

Sweden’s central bank kept its main lending rate unchanged and stuck to a plan to start tightening late next year to allow for a recovery in the largest Nordic economy to gain pace.

The repurchase rate was kept at 1 percent for a fourth consecutive meeting, the Stockholm-based bank said in a statement today, as was predicted by all 20 economists surveyed by Bloomberg. Policy makers kept a small easing bias, predicting a rate of 0.96 percent in the first half next year and then a rate of 1.25 percent in the fourth quarter.

“The repo rate needs to remain at the current low level until economic activity is showing a clearer improvement and inflation has risen for a while,” the central bank said. “As before, the repo rate is not expected to be raised until the end of 2014.”

Sweden’s economy is showing signs of a recovery after the euro area emerged from its recession. Since the Riksbank’s previous meeting in July, unemployment has fallen, manufacturing is picking up and consumer confidence has risen to a two-year high. Consumer borrowing has also gathered speed as the government plans more tax cuts next year.

Unexpected Bias

Policy makers kept a “small short-term easing bias,” Nordea Bank AB economist Andreas Wallstroem said in a note. “We had expected the Riksbank to remove the easing bias completely,” he said.

The krona fell 0.5 percent to 8.7491 per euro as of 9:51 a.m. in Stockholm.

Krona weakening has helped policy makers close in on their 2 percent inflation target and lending a hand to struggling exporters by making their products cheaper abroad.

The bank today raised its forecast for underlying inflation to 1 percent this year, and kept its forecasts for 1.4 percent and 1.9 percent in the two following years. It lowered its forecast for growth to 1.2 percent for this year and 2.7 percent next year, versus 1.5 percent and 2.8 percent earlier. It lowered its unemployment forecasts.

“The recovery abroad will contribute to brighter prospects for the Swedish economy,” the bank said. “Confidence in both the household and corporate sectors has risen and developments on the labor market have been somewhat better than expected.

Two Reservations

Still, two members of the bank’s six-member board, deputy governors Karolina Ekholm and Martin Floden, entered reservations and advocated for a cut to 0.75 percent.

While still far below target, Sweden’s consumer prices unexpectedly rose in July. Consumer prices rose an annual 0.1 percent after a 0.1 percent drop the prior month, Statistics Sweden said on Aug 13. Prices were estimated to remain unchanged. Adjusted for mortgage costs, price gains accelerated to an annual 1.2 percent from 0.9 percent. Inflation adjusted for mortgages has held below the target since 2010.

More recently, investors have sold the krona as liquidity replaces public finance health as a driver of capital flows following signals from the U.S. Federal Reserve that it’s preparing to scale back stimulus.

Fed tapering of $85 billion in monthly bond purchasing perhaps as early as this month is good news for the export-reliant Swedish economy since it’s evidence that the world economy is improving, Hans Lindblad, director-general at the Swedish National Debt Office, said in an interview this week.

Tax Cuts

Prime Minister Fredrik Reinfeldt last month called for a fifth round of income tax cuts since he came to power in 2006 to boost growth and cut unemployment. The government last month said it will spend 25 billion kronor ($3.8 billion) on new initiatives next year to boost demand.

Swedish consumer confidence rose to its highest level since 2011 last month as rising export orders prompted manufacturers to scale back job cuts. Activity in the manufacturing sector expanded at the second highest pace in two years last month, while unemployment fell to 7.2 percent in July.

Meanwhile, lending to Swedish households grew the most in more than a year in July, adding to fears of an emerging housing price bubble. Household debt has almost doubled to more than 170 percent as a share of disposable incomes in the past 20 years, while apartment prices have risen more than twofold since 2000.

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