Sweden: Riksbank maintains policy rate in October
October 27, 2016
At its 26 October monetary policy meeting, the Riksbank decided to hold its repo rate at a record low of minus 0.50%, as expected by the market. Central Bank governor Stefan Ingves announced that rates will not be raised until 2018, six months after the mid-2017 date the Bank had foreseen in September, because inflation will take longer to reach the objective of 2.0%. The decision came on the back of September’s disappointing inflation figures, which heightened market concerns about a possible further rate cut in December. Inflation was 0.9% in September, the lowest value since May 2016.
Domestic and external factors are both weighing on Swedish price developments. Both demand and inflation are subdued globally, while recent slower GDP growth and the slowdown in the decline of unemployment added further downward pressure on prices from the domestic side. However, economic activity is expected to grow and the underlying resource utilization rate will likely accelerate in the future, meaning that domestic price pressures will increase. The Central Bank is confident that inflation will pick up in the coming months and reach the 2.0% objective in mid-2018.
The Riksbank also confirmed that its quantitative easing program—SEK 245 billion worth of government bond purchases—will continue until the end of the year and, if necessary, the Bank said that it is ready to make its monetary policy even more expansionary since the Central Bank’s balance sheet still has the potential to be expanded.
The monetary policy decision triggered a further depreciation of the krona, which was one of the worst performing currencies last month, after the pound. While the Central Bank looks favorably on a weaker krona, as depreciation may result in higher inflation, institutional investors and the government fear that the weaker currency will reduce households’ purchasing power. The Riksbank said that it is ready to intervene in the FX market if this becomes necessary. The next policy meeting is scheduled for 20 December.
Author: Andrea Vetrugno, Economist