Sweden: Riksbank holds repo rate steady and hints at tightening monetary policy
September 7, 2017
At its 7 September monetary policy meeting, the Riksbank kept the repo rate steady at a record low of minus 0.50%, resisting calls to normalize monetary policy as the economy is recovering well. Moreover, the Bank decided to continue with its purchases of government bonds during the second half of 2017. Despite the strength of the Swedish economy and an acknowledgement of the risks associated with low interest rates, the move was in line with analysts’ expectations.
The Central Bank continued to emphasize its commitment to stabilizing the inflation rate at around 2.0%. Labor market conditions are improving amid strong economic growth rates, which should keep the recent inflationary pressures afloat. Although inflation has been higher than expected, the Bank noted that it has risen largely due to ultra-loose monetary policy, as well as some temporary factors. Any hasty withdrawal of monetary stimulus would therefore risk inflation declining below target once more. Hence, the statement from the Bank included a reiteration of its commitment to an expansionary monetary policy to maintain the role of the inflation target as the nominal anchor for price setting and wage formation.
At the same time, the Bank acknowledged the downside of negative interest rates, which increase the risks linked to high household indebtedness. Analysts are accusing the Riksbank of targeting inflation at the expense of economic stability as signs of overheating appear: House prices are spiraling upwards and household debt is at elevated levels. The ratio of household debt to total disposable income currently stands at 180%, significantly more than in peer countries. Yet, the Bank considers fiscal and macroprudential policy to be the tools with which to address these issues.
As of September of this year, the Riksbank adopted CPIF (the consumer price index with a fixed interest rate) as the formal target variable for the inflation target, which currently stands at 2.0%. Although inflation is seen stabilizing near the target (August: 2.1%; July: 2.2%) and the Bank has revised up its inflation forecasts for this year and the next, it does not expect to raise interest rates until the middle of next year. However, economists at Swedbank, keeping an eye on events, commented that, “A revision upwards in the repo rate path is plausible to be announced later in the autumn, particularly if inflation development continues to surprise on the upside and the inflation outlook is further revised upwards.”
However, according to the research team at SEB, things have become more complicated: “Upward revisions to inflation outlook makes the shift towards a tighter monetary policy more difficult, not easier”. In addition, the statement implied reactionary tactics from the Bank, which stressed the importance of not deviating from the current norm. Moreover, it is wary that a rate hike before an increase in rates from the European Central Bank could lead to a rapid appreciation of the krona, which would drag on inflationary pressures. As the research team at SEB pointed out, “Historically shifts in the Riksbank policy have happened relatively abruptly rather than through gradual changes.”
The next monetary policy meeting is scheduled for 25 October.
Author: Jan Lammersen, Economist