Riksbank Signals Greater Chance of Cut to Rekindle Inflation

Sweden’s central bank kept its main interest rate unchanged and signaled a greater chance that it will ease policy to ward off the threat of deflation in the largest Nordic economy.

The repurchase rate was held at 0.75 percent for a second meeting, the Stockholm-based bank said today. The move was predicted by 19 of 21 economists surveyed by Bloomberg, with two forecasting a cut. The rate is projected at 0.66 percent in the third quarter, 0.65 percent in the fourth quarter and 0.73 percent in the first quarter 2015.

“It’s considered appropriate to wait until inflation picks up before beginning to raise the repo rate,” the bank said. “The repo-rate path has been adjusted down somewhat and reflects a greater probability of a repo-rate cut in the near term compared with the assessment made in February.”

The bank cut rates in December to prevent deflation from taking hold as price growth has undershot its 2 percent target for more than two years. Policy makers, led by Governor Stefan Ingves, had been reluctant to ease policy as they balanced falling prices against record consumer debt burdens.

Two Reservations

Two of the bank’s six board members, deputy governors Karolina Ekholm and Martin Floden, voted to cut rates to 0.5 percent.

The krona slid 0.4 percent to 9.0011 per euro as of 1:05 p.m. in Stockholm.

“The new repo rate path has a probability of 36 percent for a rate cut in July, which is as clear a signal of a rate cut as it gets,” said Andreas Wallstroem, an analyst at Nordea Bank AB, in a note. Nordea today changed its forecast and now expects a rate cut to 0.5 percent in July.

The European Central Bank kept its rate unchanged at a record low of 0.25 percent last week and revealed it was considering quantitative easing to fight deflation as the 18-nation bloc emerges from its recession. Inflation in the euro area slid to 0.5 percent in March, the slowest pace since November 2009.

While Swedish consumer prices fell on an annual basis in both January and February, there are indications the economy is picking up as an export slump eases. Sweden sells about half its $560 billion in output abroad, of which about 70 percent goes to Europe. Sweden’s government today raised its outlook for growth to 2.7 percent this year, after a 1.5 percent expansion in 2013.

Higher Unemployment

The Riksbank also raised its growth forecast, predicting an expansion of 2.7 percent this year, while lowering next year’s estimate to 3.2 percent from 3.6 percent. The bank sees unemployment at 7.9 percent this year and 7.3 percent next year, one tenth higher than the previous estimate.

The economy, home to mobile network maker Ericsson AB and appliance maker Electrolux AB, grew a more-than-estimated 3.1 percent in the fourth quarter as consumers compensated for falling exports. Manufacturing expanded the most in two years last month and annual industrial production rose for a third month in four in February, following 14 consecutive months of declines.

The government of Prime Minister Fredrik Reinfeldt, which is trailing behind the Social Democrat-led opposition in polls ahead of September elections, this year lowered income taxes to boost demand. It was the fifth round of tax cuts since Reinfeldt came to power in 2006. The reductions, along with near-record low rates, have pushed home prices higher and added to household debt, which stands at more than 170 percent of disposable incomes. Apartment prices have more than doubled since 2000 after rising 11 percent last year.

Stricter Rules

The Riksbank has joined the government and the financial watchdog to work on stricter rules to halt a further build-up of consumer debt. The Swedish Bankers’ Association last month recommended lenders force more borrowers to pay down their home loans following a string of measures to reduce debt.

The bank argues more regulation would allow it to focus less on debt and more on its inflation target. Opposition lawmakers have also argued that the Riksbank needs to focus more on the labor market.

Sweden’s jobless rate was a seasonally-adjusted 8.1 percent in February compared with 6.7 percent when Reinfeldt’s government was first elected in Sept. 2006.