Riksbank Reduces Rates as Disinflation Hurts Credibility

Sweden’s central bank cut its main interest rate for the first time in a year and signaled it won’t tighten policy until the start of 2015 to combat deflation in the largest Nordic economy.

The repurchase rate was lowered by a quarter of a percentage point to 0.75 percent, the first cut since December 2012, the Stockholm-based bank said today in a statement. The move was predicted by 16 of the 22 economists surveyed by Bloomberg. The bank sees its key rate at 0.71 percent in the fourth quarter next year and at 1.88 percent in the same quarter the following year.

“Inflation has been unexpectedly low and, despite the recovery, inflationary pressures over the coming year are expected to be much lower than in the most recent forecast in October,” the bank said. “Slow increases in the repo rate are not expected to begin until the start of 2015.”

The Riksbank, which signaled in October its next step would be to raise rates at the end of 2014, opted to ease policy after criticism from economists at some of Scandinavia’s biggest banks it was ignoring its inflation mandate. Governor Stefan Ingves has countered that policy needs to balance the price goal with risks stemming from a credit-driven housing boom.

Yields Fall

The krona slid 0.1 percent to 9.061 per euro as of 9:55 a.m. in Stockholm. Sweden’s two-year yields fell seven basis points to 0.75 percent.

“The risks linked to high household indebtedness remain, but the low inflation rate justifies cutting the repo rate,” the bank said. The six-person board was unanimous in its decision to cut rates, according to the bank.

Sweden, which sends about half its output abroad, has grappled with weak export markets as the euro area struggles to emerge from a recession. The European Central Bank this month kept its main rate unchanged, after in November cutting the benchmark to a record low of 0.25 percent. Norway’s central bank this month delayed its plans to tighten by a year to mid-2015.

“The credibility of their inflation target has started to chip away at the edges so it would have been weird if they didn’t do anything about that,” said Mikael Grahn, an analyst at Danske Bank A/S in Stockholm. “The changed repo rate forecast feels more reality-based but there’s a risk they may have to delay the timing of their first rate increase even further.”

Investor Survey

A survey by SEB AB published last week showed a majority of investors and traders thought the bank’s perceived reluctance to cut was harming its inflation target. More than 25 percent also said the bank’s underlying inflation forecast wasn’t credible, while half urged the bank to introduce a tolerance band.

Headline consumer prices fell for a second month in November, when they dropped 0.1 percent. Adjusted for mortgage costs, inflation was an annual 0.7 percent. By that measure inflation hasn’t reached the 2 percent target since December 2010.

At the same time, private debt has risen to more than 170 percent of disposable incomes, making Swedish households among the most indebted in Europe.

Riksbank policy makers have had to base their decision on a mixed array of data.

Surveys show consumer confidence is at a two-year high while activity in the manufacturing and services industries is increasing. Other data have shown retail sales were little changed in October, while industrial production dropped 5 percent and an unemployment rose to 8 percent. Gross domestic product grew just 0.1 percent in the third quarter from the previous three months after contracting in the previous quarter.

Fiscal Policy

Central bank easing will coincide with laxer fiscal policy. The government has said it will cut income taxes next year for a fifth time since coming to power in 2006. Prime Minister Fredrik Reinfeldt says the cuts are designed to boost domestic demand.

In an effort to address Sweden’s private debt burden, authorities are raising capital requirements on banks to restrain lending. Ingves has argued the central bank can’t afford to take its eye off the housing market even amid tighter macroprudential oversight.