Sweden: Riksbank keeps rates unchanged in July, maintains that rates will start rising towards the end of the year
July 3, 2018
At its 2 July monetary policy meeting, the Riksbank decided to keep the monetary policy rate unchanged at a record low of minus 0.50%. It also upheld its previous decision to keep reinvesting redemptions and coupon payments in the Bank’s bond portfolio until further notice, following the official end of the Bank’s QE program in December 2017.
The Riksbank’s decision came as CPIF inflation—the Bank’s preferred measure, which assumes a fixed interest rate—remains around the 2% target, supported by higher oil prices. However, the Bank highlighted that underlying price pressures are mild, despite strong domestic economic activity. In addition, the European Central Bank has yet to tighten its monetary stance. A premature rate hike by the Riksbank could therefore cause the krona to appreciate notably against the euro, making it harder to meet the inflation target. In order to avoid such a scenario, and to continue nurturing inflation, the Bank decided to stay put.
In its communiqué, the Riksbank reiterated the guidance in its prior meeting that interest rates would likely begin rising “towards the end of the year”. The Bank also revised up its CPIF inflation forecasts for 2018 and 2019, from 1.9% in both years to 2.1% in both years, on a weaker krona and higher international oil prices. This, together with the fact that two board members opted for earlier rate tightening, hints at a shift towards a slightly more hawkish stance within the committee. However, any tightening of the monetary policy stance is likely to be slow to protect the currency, and several FocusEconomics panelists still see the Bank waiting until 2019 to raise rates.
Author: Oliver Reynolds, Economist