Sweden holds rate but delays next hike on low inflation

April 26, 2019

By CentralBankNews.info

Sweden’s central bank left its key repo rate steady at minus 0.25 percent, as widely expected, but delayed any further tightening of its monetary policy stance by pushing back the time for its next rate hike until the end of this year or early next year to ensure inflation remains around its target.
Sveriges Riksbank in December 2018 raised its rate for the first time in 7-1/2 years and had planned to raise the rate a second time in the second half of this year as economic activity has remained solid and inflation is close to the bank’s 2.0 percent target.
“However, the outcomes in recent months imply that inflationary pressures are a little weaker than expected,” and together with lower inflation abroad – especially in the euro area – this indicates inflation will be lower in coming years, the Riksbank said, adding:
“The repo rate is expected to be raised again towards the end of the year or at the beginning of next year and rate rises thereafter are expected to occur at a somewhat slower pace.”
The Riksbank forecast the repo rate would average minus 0.2 percent this year, the same as it forecast in February, and then rise to 0.1 percent in 2020, down from its earlier forecast of 0.3 percent, and then 0.5 percent in 2021, down from 0.8 percent.
Underscoring its continued expansionary monetary policy, the Riksbank also nsaid it would purchase government bonds at a nominal value of 45 billion Swedish crowns, or krona, between July 2019 and December 2020, an amount equal to around half of the payments and coupons it will receive on its current stock of government bonds.
As other major central banks, the Riksbank has used asset purchases – known as quantitative easing – as an additional easing tool since the global financial crises to hold down bond yields.
The Riksbank first began buying bonds in February 2015 but concluded this program in December 2017. Since then it has continued to reinvest principal payments and coupons, and at the end of March its bond holdings amounted to 316 billion krona, down from 355 billion at the end of January but up from 290 billion in December 2017.
The decision to buy 45 billion krona of bonds means the Riksbank will maintain its level of holdings close to the average level since net purchases were concluded and is part of its strategy of gradually normalizing monetary policy.
In December 2020 the Riksbank’s board will decide if it wants to continue to purchase bonds and in the long run it expects its holdings to be smaller than today but the exact size is unclear.
Sweden’s inflation rate has fluctuated around 2.0 percent since mid-2017 but the Riksbank said continued low inflation and low interest rates abroad, along with uncertainty over global developments “emphasize that there is a need to proceed with caution in monetary policy.”
Headline inflation in Sweden was steady at 1.9 percent in the first three months of this year and is seen averaging 2.0 percent this year, down from its previous forecast of 2.2 percent,
Next year inflation is forecast to rise to 2.3 percent in 2020, down from 2.6 percent previously forecast, and then to rise to 2.6 percent in 2021, down from 3.0 percent.
Sweden’s economy grew faster than expected in the fourth quarter of last year, partly due to a bounce-back from a weak third quarter, but is now expected to enter a period of lower growth due to slower demand for its exports and an easing of domestic demand from lower housing investment.
Gross domestic product is estimated to have expanded 2.3 percent in 2018 but is then expected to slow to 1.7 percent in 2019 but this is about its February forecast of 1.3 percent.
The Riksbank’s forecast for 2020 and 2021 GDP growth are unchanged, at 1.9 percent and 1.8 percent, respectively.
In response to the Riksbank’s decision, the krona fell almost 1-1/2 percent to 9.55 to the U.S. dollar, the lowest level since mid-2002, and is now down almost 6 percent this year.
Two of the Riksbank’s deputy governors, Martin Floden and Henry Ohlsson, did not agree with the decision to buy bonds from July through December next year, saying there are risks associated with these purchases and they don’t contribute to reaching the monetary policy target “in a clear way,” according to the bank’s release.

Sveriges Riksbank released the following press release:

“Activity in the Swedish economy is high and inflation is close to the target of 2 per cent. The strong economic activity in Sweden indicates that inflation will remain close to target going forward but recent outcomes suggest that inflationary pressures are slightly weaker than expected. The Executive Board has decided to hold the repo rate unchanged at –0.25 per cent and assesses that the rate will remain at this level for a somewhat longer period of time than was forecast in February. The repo rate is expected to be raised again towards the end of the year or at the beginning of next year and rate rises thereafter are expected to occur at a somewhat slower pace. The Executive Board has also decided that the Riksbank will purchase government bonds for a nominal value of SEK 45 billion from July 2019 to December 2020.

Good economic activity despite lower growth rate

The good global economic activity is continuing and as expected has entered a phase with lower growth rates. However, inflation abroad has been unexpectedly weak, especially in the euro area. Several central banks have communicated a more expansionary monetary policy. There is still considerable uncertainty over international developments.
Activity in the Swedish economy is high and growth was unexpectedly rapid in the fourth quarter. The high level of demand in recent years has led to strong developments on the labour market with a historically high employment rate. Economic prospects continue to look good despite the economy entering a phase of lower growth than previously.

Inflation close to target but slightly weaker inflation prospects

Inflation and inflation expectations have been close to 2 per cent for about two years. Although inflation is expected to temporarily fall back this year, due to the assessment that energy prices will not increase as quickly as last year, the strong economic activity in Sweden and rising inflationary pressures abroad indicate that inflation will continue to remain close to the target going forward. However, outcomes in recent months suggest that inflationary pressures are slightly weaker than expected and, overall, inflation is now expected to be somewhat lower over the next few years compared with the previous forecast.

Rate increases at a somewhat slower pace

Unexpectedly low inflation both in Sweden and abroad, low interest rates abroad and uncertainty over global developments emphasise that there is a need to proceed with caution in monetary policy. The Executive Board has decided to hold the repo rate unchanged at –0.25 per cent and assesses that the rate will remain at this level for a somewhat longer period of time than was forecast in February. The repo rate is expected to be raised again towards the end of the year or at the beginning of next year. Increases in the repo rate thereafter are expected to occur at a somewhat slower pace, compared with the assessment in February.
The Executive Board has also decided that the Riksbank will purchase government bonds for a nominal value of SEK 45 billion from July 2019 to December 2020. This corresponds to around half of the principal payments and coupons that the Riksbank will receive from the bond portfolio during this period. The purchases will take place in order to maintain an appropriate level of holdings and the Riksbank’s presence in the market.

Important to have measures to reduce the risks associated with household indebtedness

Swedish households are highly indebted and therefore sensitive to changes in economic conditions, such as rising interest rates or higher unemployment. In order to reduce the risks linked to household indebtedness and address the structural problems on the Swedish housing market, measures within housing and tax policy and an appropriate macroprudential policy are required.
Forecast for Swedish inflation, GDP, unemployment and the repo rate*
2018 2019 2020 2021
CPI 2.0 (2.0) 2.0 (2.2) 2.3 (2.6) 2.6 (3.0)
CPIF 2.1 (2.1) 1.8 (2.0) 1.8 (1.8) 1.9 (2.0)
GDP 2.3 (2.2) 1.7 (1.3) 1.9 (1.9) 1.8 (1.8)
Unemployment, per cent 6.3 (6.3) 6.4 (6.3) 6.5 (6.5) 6.6 (6.6)
Repo rate, per cent −0.5 (−0.5) −0.2 (−0.2) 0.1 (0.3) 0.5 (0.8)
*Annual percentage change, annual averageNote. The assessment in the Monetary Policy Report in February 2019 is shown in brackets.
Sources: Statistics Sweden and the Riksbank.
Forecast for the repo rate*
2019
Q1
2019
Q2
2020
Q2
2021
Q2
2022
Q2
Repo rate –0.27 (–0.27) –0.25 (–0.24) 0.04 (0.23) 0.42 (0.73) 0.80
*Per cent, quarterly mean valuesNote. The assessment in the Monetary Policy Report in February 2019 is shown in brackets.Source: The Riksbank.
Deputy Governors Martin Flodén and Henry Ohlsson entered reservations against the decision to purchase government bonds from July 2019 to December 2020. They consider that further purchases will not contribute to monetary policy target attainment in a clear way, but that there are risks associated with additional purchases. They also referred to their previous reservations in connection with the Riksbank’s decisions on bond purchases, most recently in December 2017.
The decision on the repo rate will apply from 8 May 2019. The minutes from the Executive Board’s monetary policy meeting will be published on 7 May. Further information on the bond purchases can be found in a separate annex to the minutes at www.riksbank.se.. A press conference with Governor Stefan Ingves and Jesper Hansson, Head of the Monetary Policy Department, will be held today at 11.00 at the Riksbank. Press cards must be shown. The press conference will be broadcast live on www.riksbank.se.”

 


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