Sweden: Riksbank maintains policy rate in September as macroeconomic environment remains unchanged
September 7, 2016
At its 6 September policy meeting, the Riksbank decided to hold its repo rate at a record low of minus 0.50%, as expected by the market, and postponed the future interest rate hikes it had planned, which are now set for the second half of 2017. The Riksbank’s Executive Board attributed the decision to the fact that the global economic climate has not changed since the last meeting held in July. The outlook is clouded by the still uncertain consequences of the Brexit referendum and weaknesses in the European banking system, prompting the Bank to maintain its accommodative policy stance in order to shield Sweden from potential adverse macroeconomic shocks.
A series of external and internal factors are helping the Central Bank to increase inflation towards its 2.0% target, which has been its long-term goal for nearly five years. First of all, the Swedish economy has been one of the fastest-growing on the continent in recent years, logging 3.1% year-on-year growth in the second quarter of 2016. Low unemployment is also adding to inflationary pressures and, coupled with the weaker krona triggered by the Brexit vote, pushing up consumer prices. Inflation was 1.1% in July, marking the highest value since April 2012.
In April, the Bank had indicated that the first repo rate increase would take place in the first quarter of 2017, but the rate hike is now foreseen for H2 2017. The Riksbank also confirmed at the September meeting that its quantitative easing program—SEK 245 billion worth of government bond purchases—will continue until the end of the year but that it has started to scale it down, since it already owns two thirds of the outstanding government bonds. The Bank also stated that until further notification, “maturities and coupon payments on the holdings in the government bond portfolio will be reinvested.” By purchasing government bonds, the Bank hopes to bring down government bond yields, which act as a benchmark for other yields in the economy, and to drive down the costs of financing for banks and other businesses. This puts downward pressure on the krona by making krona-denominated assets less attractive.
Despite the promising path inflation has taken, the Riksbank said that it stands ready to take further extraordinary measures to tackle low inflation if needed, even by decreasing the repo rate if the ECB decides to deliver more stimulus, or intervening in the FX market in the case of a rapidly appreciating krona that could reverse the recent price developments. The next policy meeting is scheduled for 26 October, although the Bank has reserved the right to make policy decisions at irregular dates between scheduled meetings.
Author: Andrea Vetrugno, Economist