Sweden Leaves Key Rate at -0.5%
The central bank of Sweden kept its benchmark repo rate at -0.5 percent on April 21st, 2016 and expanded its programme of asset purchases for a further SEK 45 Billion during the second half of the year. Although inflation is rising, the upturn is fitful and policymakers showed concerns about uncertainty over global developments. The bank also said that its monetary policy needs to continue to be expansionary, in order to reduce the risk of the krona appreciating faster than forecasted and a break in the upturn in inflation.
4/21/2016 11:47:58 AM
Excerpts from the Statement by the Executive Board of the Riksbank:
The expansionary monetary policy, with repo-rate cuts and purchases of nominal government bonds, has contributed to the continued strengthening in economic activity in Sweden. Both GDP growth and inflation have become higher than expected. But although inflation is rising, the upturn is fitful and inflation is expected to undershoot the target in 2016, too.
At the same time, the prospects for global economic activity are still uncertain and several central banks are conducting highly expansionary monetary policies so that economic activity improves and inflation rises. With continued expansionary monetary policy abroad, there is a risk that the krona will appreciate earlier and faster than in the forecast. This could dampen growth and inflation in Sweden and affect confidence in the inflation target.
To ensure the positive development of the Swedish economy and that the rising trend in inflation continues, the Executive Board has decided to continue purchasing securities for a further SEK 45 billion during the second half of 2016, so that the purchases will total SEK 245 billion at the end of 2016. To achieve a broad impact on different interest rates, the purchases will cover both nominal and real government bonds corresponding to SEK 30 billion and SEK 15 billion respectively. The strong development of the Swedish economy justifies these purchases taking place at a somewhat slower pace than previously, however.
The continued asset purchases will reduce the risk of the krona appreciating faster than in the forecast and of a break in the upturn in inflation. The Riksbank will also continue to reinvest maturities and coupons from the government bond portfolio until further notice. The repo rate is held unchanged at -0.50 percent and will start to be raised slowly in the middle of 2017, when CPIF inflation is expected to be close to 2 percent.
Even if it is less likely that further monetary policy stimulation will be needed in the period ahead, as economic activity strengthens and inflation approaches the target, negative surprises may lie ahead. Whether, and if so how, monetary policy will then react depends on how the outlook for inflation is affected. The important thing for monetary policy is for the trend in inflation to come closer the target and for confidence in the inflation target not to be weakened.
In light of this, the Executive Board is still therefore highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings. There is still scope to cut the repo rate further. If necessary, the Riksbank could also adopt measures in the framework for the implementation of monetary policy to support monetary policy. In addition, the asset purchases could be extended. The Riksbank is also prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation.