Excerpts from the Statement by the Executive Board of the Riksbank:
There are signs that underlying inflation has bottomed out, but the situation abroad is now more uncertain and this increases the risk that inflation will not rise sufficiently fast. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points, to -0.10 per cent, and to adjust the repo-rate path down somewhat. At the same time, the interest rates on the fine-tuning transactions in the Riksbank's operational framework for the implementation of monetary policy are being restored to the repo rate +/- 0.10 percentage point. Moreover, the Riksbank will buy government bonds for the sum of SEK 10 billion. These measures and the readiness to do more at short notice underline that the Riksbank' is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation.
Although the recovery abroad is slow, growth in Sweden will benefit from the low oil prices, the weaker krona and the very low repo rate. GDP growth is expected to increase at a faster pace in the coming period and the labour market is expected to strengthen.
Inflation is still low, but there are now signs that underlying inflation, for instance, the CPIF excluding energy, has bottomed out and is rising. The krona is weaker than anticipated, which will also contribute to somewhat higher inflation. However, low energy prices are expected to hold down CPIF inflation in the year immediately ahead.
The recent development of inflation has been roughly as expected, but there is a risk that low oil prices will dampen inflation expectations, and thus inflation, more than is assumed in the forecast. To this can be added the increased uncertainty about developments abroad and on the financial markets.
The Executive Board of the Riksbank assesses that a more expansionary monetary policy is needed to support the upturn in underlying inflation so that CPIF inflation approaches 2 per cent and to ensure that long-term inflation expectations are compatible with the inflation target. The Board is therefore cutting the repo rate to -0.10 per cent and adjusting the repo-rate path downwards. At the same time, the interest rates on the fine-tuning transactions in the Riksbank's operational framework for the implementation of monetary policy are being restored to the repo rate +/- 0.10 percentage point. The repo rate is expected to remain at -0.10 per cent until CPIF inflation is close to 2 per cent. It will not be appropriate to increase the repo rate until the second half of 2016.
When the repo rate is close to its lower bound, monetary policy can be made more expansionary by purchasing government bonds. The Riksbank will therefore soon make purchases of nominal government bonds with maturities from 1 year up to around 5 years for a sum of SEK 10 billion. This measure also contributes to making monetary policy more expansionary.