Swedish Central Bank Cuts Rates to 0.25%

At its July 3rd meeting, the Executive Board of the Riksbank reduced the repo rate by 50 bps to 0.25 percent, as inflation remains lower than expected. The central bank also said that rate increases are not expected to begin until the end of 2015.

Excerpt from the statement by the Executive Board of the Riksbank:

In Sweden, economic activity is continuing to strengthen, mainly driven by a strong household sector and rising housing investment. When demand abroad picks up, growth in the more export-dependent parts of the business sector will also increase. Stronger economic activity will lead to rising demand for labour and the labour market is expected to gradually improve.

At the same time as economic activity is strengthening, inflation is low and the outcomes have been lower than expected. There has been a broad fall in inflation and it is now assessed that underlying inflationary pressures are clearly lower than assessed in April. The repo rate and the repo-rate path therefore need to be even lower for inflation to rise towards the target. A further factor taken into account is that the forecasts for international policy rates have been revised downwards.

The low repo rate will contribute to higher demand in the economy as a whole, which will lead to inflation rising. It will also counteract the effects of the lower international policy rates on the exchange rate and inflation.

In addition to leading to higher inflation, the expansionary monetary policy can also contribute to inflation expectations remaining anchored around 2 percent by sending a clear signal that monetary policy will ensure that inflation approaches the inflation target within the reasonably near future. CPIF inflation is expected to reach 2 per cent at the beginning of 2016.

It is assessed as appropriate to slowly begin raising the repo rate at the end of 2015. At the end of 2017, the repo rate is expected to be just over 2 percent. From an historical perspective, this is a low policy rate in a stage where economic activity is considered to be balanced and CPIF inflation is close to 2 per cent. Similar conditions also apply for many other central banks.

The low interest rates are already contributing to a relatively rapid increase in household debt as a percentage of household income. An even lower repo rate will strengthen this tendency, thus increasing the risk of the economy developing in an unsustainable way in the long run.

Swedish Central Bank Cuts Rates to 0.25%

Riksbank | Joana Taborda | joana.taborda@tradingeconomics.com
7/3/2014 11:54:28 AM