Sweden Holds Repo Rate at -0.5%, Lowers Rate Path

Sweden's central bank left its benchmark repo rate unchanged at -0.50 percent on July 6th and said there will be a longer delay until the repo rate begins to be raised. Although economic activity is strengthening, policymakers noted that uncertainty over economic developments abroad has increased as a consequence of the result of the British referendum on the EU. The bank also said it was ready to make monetary policy more expansionary if the inflation prospects deteriorate.
Central Bank of Sweden | Joana Ferreira | joana.ferreira@tradingeconomics.com 7/6/2016 8:59:35 AM
Excerpts from the Statement by the Executive Board of the Riksbank:

The forecast for GDP developments abroad, and particularly for the United Kingdom, has been revised down as a result of the increased uncertainty arising from the UK voting to withdraw from the EU. The Riksbank's assessment remains that global economic activity will continue to strengthen, but at a slower rate than was previously forecast. 

Supported by the highly expansionary monetary policy in recent years, economic activity in Sweden has strengthened rapidly and inflation has shown a rising trend. Although the forecast for GDP growth going forward has been revised down due to weaker international developments and increased uncertainty, economic activity is expected to continue improving. This creates the conditions for inflation to continue rising.

At present, it is difficult to assess the political and economic consequences of the outcome of the UK referendum, but the Riksbank assumes so far that the effects on the Swedish economy will be relatively limited. There is a risk of larger negative effects, but these are at present difficult to quantify in a forecast. The Riksbank is following developments closely and its forecasts will be adjusted as more information becomes available.

A highly expansionary monetary policy is needed to provide continued support to the Swedish economy and rising inflation. The Executive Board has therefore decided to hold the repo rate unchanged at  0.5 per cent. Given the increased uncertainty, the Executive Board now assesses that it will take longer before the repo rate begins to be raised. Slow increases in the repo rate are not expected to begin until the second half of 2017. The purchases of government bonds will continue during the second half of 2016, as de-cided in April. The Riksbank will also continue to reinvest maturities and coupons from the government bond portfolio until further notice.

The Executive Board remains 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 still prepared to intervene on the foreign exchange market if the krona appreciates so quickly as to threaten the upturn in inflation. The Executive Board has therefore also taken a decision to extend the mandate that facilitates a rapid intervention on the foreign exchange market.

The repo rate needs to be low to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation. But the low interest rate levels also entail risks, such as rising house prices and increasing household indebtedness. A long-term sustainable development of the Swedish economy needs targeted measures to manage these risks within macroprudential policy, housing policy and fiscal policy.

Sweden Holds Repo Rate at -0.5%, Lowers Rate Path