Sweden’s Riksbank Keeps Main Rate at 1% to Support Recovery

Sweden’s central bank left its main lending rate unchanged and signaled it may keep rates on hold longer than previously assessed as it attempts to support a recovery without fueling a housing bubble.

The Riksbank voted four-to-two to hold its repurchasing rate at 1 percent for a fifth meeting this year, the Stockholm-based bank said in a statement today. The move was predicted by all 17 economists surveyed by Bloomberg. The bank said it sees its main rate at 1.15 percent in the fourth quarter next year, versus 1.25 percent in September.

“The repo rate needs to remain at this low level until economic activity is stronger and inflation rises,” the bank said. “As before, the repo rate is not expected to be raised until the end of 2014.”

The bank lowered its forecasts for economic growth and inflation this year as the largest Nordic economy struggles to overcome slack demand from the euro area. The bank predicts consumer prices will stay unchanged this year and rise 1.2 percent in 2014 compared with a forecast in September of 0.1 percent and 1.3 percent, respectively. It cut its growth forecast to 0.7 percent for 2013 from 1.2 percent and 2.6 percent in 2014 from 2.7 percent previously.

The Swedish krona strengthened 0.2 percent to 8.7660 per euro as of 10:08 a.m. in Stockholm.

“The market had largely factored in” the delayed rate increase forecast, said Carl Hammer, a currency strategist at SEB in Stockholm.

Monitoring Debt

Sweden’s export-reliant economy is growing faster than much of the rest of Europe as the AAA-rated government in Stockholm uses its budget to help support demand. Prime Minister Fredrik Reinfeldt has promised a fifth round of income tax cuts since his administration took office in 2006, as he predicts accelerating economic growth next year.

Unemployment has been lower than the Riksbank’s forecasts and manufacturing has picked up since the September meeting. Lending to consumers has also continued to gather speed, prompting concerns a housing bubble may be building after Swedes took on record debt burdens to finance their property purchases.

‘Right Thing’

“It’s the right thing to do to keep rates unchanged since warning lights are blinking red on the housing market” and the Swedish economy will gradually recover, said Knut Hallberg, an analyst at Swedbank AB. Swedbank forecasts the next rate increase in September.

Lending to Swedish households grew the most in more than a year in August. Household debt has almost doubled over the past 20 years to more than 170 percent of disposable incomes, central bank data show. Apartment prices have risen more than twofold since 2000.

Sweden in August chose the Financial Supervisory Authority over the Riksbank as responsible for tools to safeguard financial stability. The country will force banks to keep more capital on top of some of the world’s highest requirements from July next year. Riksbank Governor Stefan Ingves wants to raise risk weights to 35 percent even after the financial watchdog tripled them to 15 percent this year.

“Once measures have been taken in the field of macroprudential policy, the risks linked to household debt can be assumed to decline,” the Riksbank said. “This will have an impact on the conditions for monetary policy, but it is difficult to determine as yet how much and how quickly.”

Two of the Riksbank’s six-member board, deputy governors Karolina Ekholm and Martin Floden, voted for a cut to 0.75 percent and argued the rate should stay at that level through the third quarter next year.

The krona has weakened about 0.9 percent since the Riksbank’s September meeting, helping the bank reach its inflation target of 2 percent and supporting exports.

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