Sweden: Riksbank makes aggressive rate cut to counter low inflation
July 3, 2014
At its 3 July monetary policy meeting, the Central Bank (Riksbank) announced that it would cut the repo rate from 0.75% to 0.25%. The market was expecting a less aggressive cut to 0.50%.
The Bank stated that economic activity is still strengthening, owing mainly to, “a strong household sector and rising housing investment.” Moreover, growth in the export sector is expected to increase as foreign demand picks up. A stronger economic environment will also help boost the labor market.
Despite positive signs of economic growth, Riksbank also acknowledged that inflation is notably low and that inflation expectations have been lower than expected. It decided that a lower repo rate would be necessary to counteract the weak inflationary pressures in the economy and to help push inflation back up towards the target of 2.0%. The Riksbank explained that, “the low repo rate will contribute to higher demand in the economy as a whole, which will lead to inflation rising.” At this point, the Bank expects inflation to reach its target at the beginning of 2016 and therefore will not raise rates until the end of 2015.
The Riksbank recognized that this is a unique situation where a low repo rate is necessary despite the economy being in a stage of recovery. However, the Bank wanted to, “send a clear signal that monetary policy will ensure that inflation approaches the inflation target within the reasonably near future.” Moreover, it also warned that lower rates will accelerate the trend of rapidly-increasing household debt and increase the risk of unsustainable economic development, which would complicate the effectiveness of monetary policy in the future. The Bank emphasized that the low rate makes it, “urgent for other policy areas to manage the risks linked to household indebtedness and to developments on the housing market.” The next monetary policy meeting will be held on 3 September.
Author: Carl Kelly, Economist