Sweden holds rate, repo path, ready to expand if needed

December 15, 2015

By CentralBankNews.info
    Sweden’s central bank kept its benchmark repo rate unchanged at minus 0.35 percent, along with its asset purchase program, but underscored that it is still “highly prepared to make monetary policy even more expansionary, even between the ordinary monetary policy meetings.”
    The Riksbank, which has cut its rate by 35 basis points this year and in October boosted its purchases of government bonds by 65 billion Swedish crowns, said it can still cut the repo rate further – as reflected in its latest forecast – and increase the volume of assets it can purchase.
    “The Riksbank is also ready to intervene on the foreign exchange market if the upturn in inflation should be threatened as the result of a problematic market development,” the Riksbank said, repeating that it also prepared to launch a program of lending to companies via banks.
    The current asset purchase program amounts to 200 billion crowns by the end of June 2016 and in its latest forecast the Riksbank maintained its expectation that the repo rate will not be raised until inflation rises to the target of around 2 percent by the first half of 2017.
    In its monetary policy report, the Riksbank maintained its forecast for a repo rate of minus 0.4 percent in 2016, rising to minus 0.1 percent in 2017 and 0.5 percent in 2018.
    This is based on the expectation that consumer price inflation will average 1.3 percent next year, slightly down from the October forecast for 1.4 percent inflation, 2.5 percent in 2017, up from 2.4 previously forecast, and 3.0 percent in 2018, down from 3.1 percent.
    For the fourth quarter of next year the repo rate is seen at minus 0.41 percent, for the fourth quarter of 2017 at 0.12 percent and then 0.66 percent for the final quarter of 2018.
    Although headline inflation has stabilized at 0.1 percent in November, the Riksbank said this was “unexpectedly weak” and the main reason for the rise in inflation was the impact of the past fall in the crown’s exchange rate and this effect is expected to wane next year.
    Globally, interest rates are expected to remain very low, which means the Riksbank has to maintain an expansionary policy to avoid a strengthening of the crown, which would make it harder to get inflation to rise and stabilize, the bank said.
     The Swedish crown started falling in March last year and continued to drop to April this year. But since then it has been more stable, trading at 8.4 to the U.S. dollar today compared with 8.8 on April 10 for a depreciation of 7.1 percent this year.
    The Riksbank, which has often voiced its concern over rising household debt from low interest rates, again appealed for reforms to increase supply of housing and reduce incentives for households to take on debt, and said it was “of the utmost importance” that the mandate of Finansinspektionen, the agency responsible for financial regulation, be clarified.
    “If no measures are taken, this, in combination with the low interest rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy,” the Riksbank warned.

     Sveriges Riksbank issued the following statement:

“Developments in the Swedish economy have been somewhat stronger than expected, while uncertainty remains globally. There has been an upward trend in inflation since last year, but it is not yet on a firm footing. To safeguard the resilience of the upturn in inflation, monetary policy needs to remain very expansionary. The Executive Board of the Riksbank has therefore decided to hold the repo rate unchanged at –0.35 per cent. Purchases of government bonds will continue for the first six months of 2016 as was decided in October. The Board is also highly prepared to make monetary policy even more expansionary, even between the ordinary monetary policy meetings.

Economic activity is stronger
The Riksbank’s very expansionary monetary policy is contributing to good growth, falling unemployment and an upward inflation trend. The sharp increase in the number of asylum seekers coming to Sweden is expected to lead to an increase in public expenditure, which will contribute to higher GDP growth and lower unemployment in the coming years. The consequences for monetary policy in the coming period are deemed to be minor, however.

Inflation not yet on a firm footing
There is now a broad economic upturn, there has been an upward trend in inflation throughout the year and inflation expectations have stabilised and begun to rise. The upturn in inflation is volatile, however, as is illustrated by the unexpectedly weak outcome for November. The fact that inflation is rising is still mainly due to the weak krona, which has contributed to a rise in the prices of imported goods and services. The contribution to inflation made by the depreciation of the krona is expected to decrease next year. In order to also support an upturn in more domestically-generated inflation, continued high levels of demand are therefore needed in the Swedish economy.

It is true that the global recovery is making progress, but inflation is low globally and many central banks are pursuing a very expansionary monetary policy. The level of international interest rates is therefore expected to remain very low in the period ahead, which means that Swedish monetary policy also needs to be expansionary. Otherwise the krona exchange rate is at risk of strengthening earlier and at a faster rate than in the forecast, which would make it harder to get inflation up and stabilise it around 2 per cent.

Continued very expansionary monetary policy
To safeguard the strength of the upturn in inflation, the Executive Board of the Riksbank has decided to hold the repo rate at –0.35 per cent. Purchases of government bonds will continue in line with the decision in October. Purchases will thereby amount to a total of SEK 200 billion at the end of June 2016. The Executive Board deems that the repo rate will not be raised until CPIF inflation has stabilised around 2 per cent during the first half of 2017.
Still highly prepared to act
The Executive Board remains highly prepared to make monetary policy even more expansionary, even between the ordinary monetary policy meetings. The repo rate can be cut further, which is reflected in the repo rate path, and the Riksbank can purchase more securities. The Riksbank is also ready to intervene on the foreign exchange market if the upturn in inflation should be threatened as the result of a problematic market development, for example. Moreover, the Riksbank is prepared to launch a programme of lending to companies via the banks.

Risks associated with household indebtedness must be managed

The Riksbank has highlighted the risks associated with the low interest rate level on many occasions. In order to reduce the risks of household indebtedness, different reforms are needed that both create a better balance between supply and demand on the housing market and reduce the incentives for households to take on debt. It is also of the utmost importance that Finansinspektionen’s mandate for macroprudential policy is clarified. If no measures are taken, this, in combination with the low interest rate level, will further increase the risks. Such a development could ultimately be very costly for the national economy.

 The decision on the repo rate will apply with effect from 16 December. The minutes from the Executive Board’s monetary policy discussion will be published on 8 January. A press conference with Governor Stefan Ingves and Marianne Nessén, Head of the Monetary Policy Department, will be held today at 11 a.m. in the Riksbank. Press cards must be shown. The press conference will be broadcast live on the Riksbank’s website, www.riksbank.se, where it will also be available to view afterwards. “

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