Riksbank Seen Cutting Rate to Minus 0.35% to Revive Inflation

Sweden’s central bank will cut its main lending rate for a third time this year as it pulls out all stops to jolt the economy out of disinflation.

The repo rate will on Wednesday be reduced to minus 0.35 percent from minus 0.25 percent, according to the median estimate of 20 analysts surveyed by Bloomberg. Nine analysts predict a deeper cut -- to as low as minus 0.4 percent or minus 0.5 percent -- while six expect the rate to be unchanged.

“They’ve been pushed a bit into a corner,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm. “Expectations of further easing from the Riksbank are keeping the krona weak and if the Riksbank doesn’t do anything this week the krona will strengthen significantly.”

Policy makers in Stockholm are taking unprecedented steps to revive inflation and to avoid a strengthening of the krona against the euro as record stimulus by the European Central Bank jars global currency markets. A stronger currency would put further pressure on Swedish inflation, which has been below or near zero since the end of 2012.

The Riksbank is also seen increasing its own bond-buying plan to beyond the 40 billion kronor ($4.6 billion) already announced. Swedbank and Nordea Bank AB forecast it will up its stimulus by another 50 billion kronor and, according to Swedbank, even include municipal and mortgage-backed bonds.

Other potential measures that have been suggested by policy makers include a loan program to companies through banks and direct currency interventions.

Act Forcefully

The bank is concerned that stagnant consumer prices and below-target inflation expectations will hold back wage demands as unions and employers representing most Swedish workers negotiate new agreements due next year.

“They are inclined to act forcefully in the short-term,” said Torbjoern Isaksson, chief analyst at Nordea in Stockholm. “If they want to affect wage negotiations by boosting inflation expectations, which is important to the Riksbank, now is the time to act.”

Annual prices rose 0.2 percent last month and 0.1 percent in February after having fallen for the previous six months. Adjusted for mortgage costs, inflation has averaged 0.6 percent in the past year. Five-year inflation expectations among labor market organizations, purchasing managers and money market participants have fallen to 1.7 percent from 2.2 percent in the past three years, according to TNS Sifo Prospera.

Sweden’s currency has weakened 1.7 percent against the euro after the Riksbank last month cited the krona and inflation as the main reasons for cutting rates for the first time in between meetings since the height of the financial crisis.

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