Bloomberg News

Swedish Riksbank Keeps Rate Unchanged, Cuts Tightening Forecast

November 04, 2011

Oct. 27 (Bloomberg) -- Sweden’s central bank kept its benchmark interest rate unchanged and signaled fewer increases to safeguard an expansion in the largest Nordic economy as European leaders struggle to contain the debt crisis.

The benchmark repo rate was kept at 2 percent for a second consecutive meeting, as expected by all 27 economist surveyed by Bloomberg, the Stockholm-based Riksbank said today. The bank forecast a repo rate of 2.3 percent in the fourth quarter next year, down from an earlier forecast of 2.6 percent.

The Riksbank’s six policy makers last month unanimously halted a cycle of seven increases since July last year as the debt crisis that started in Greece threatens to engulf the region’s larger economies and imperil global growth. Sweden relies on exports for about half its economic output, of which half is bound for the European Union.

“It’s reasonable for them to stay put since the Riksbank doesn’t know how the European debt crisis will play out,” said Martin Enlund, an analyst at Svenska Handelsbanken AB in Stockholm, before decision. “If the slowdown in Europe becomes more serious they will probably have to cut.”

European leaders at a summit overnight persuaded bond investors to take 50 percent losses on Greek debt and boosted the rescue fund to 1 trillion euros ($1.4 trillion). Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to step up debt reduction and a signal from leaders that the European Central Bank will keep up bond purchases.

Industry Contracts

Since the Riksbank’s rate meeting last month, data in Sweden have shown a deepening manufacturing contraction and slumping consumer confidence. The economy, home to wireless network maker Ericsson AB and retailer Hennes & Mauritz AB, will grow 1.3 percent next year, the government estimated in September, slashing an earlier forecast for 3.8 percent expansion. Output was 5.7 percent in 2010, the most in the European Union.

“It’s difficult to picture a future in the next few years where Europe will grow strongly,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, before today’s decision. The Riksbank will cut its rate as the debt crisis worsens, he said.

Inflation Slows

Slowing inflation and the prospect of declining home prices are also easing pressure on policy makers. Underlying inflation, which strips out rate changes, slowed to 1.5 percent in September and has held below the Riksbank’s 2 percent target all year. Some 67 percent of Swedes expect house prices to fall or stay unchanged over the next 12 months, a survey by SEB released this month showed.

Central banks around the world have returned to crisis containment, also reducing the scope of Swedish policy makers to raise rates as they avoid fanning currency gains and hurting exports. The central bank in neighboring Norway last month kept its rate unchanged for a third meeting because of “uncertainty abroad” and weaker domestic growth prospects. The U.S. Federal Reserve has said it will probably keep its rate near zero until mid-2013 while the European Central Bank has signaled it may cut rates to stave off a recession.

Krona Rally

Sweden’s krona has rallied in the past month after weakening from more than a 10-year high against the euro and a three year-high versus the dollar earlier in the year. Since Sept. 23, the currency has risen 2.7 percent to 9.1109 per euro and 5.5 percent against the dollar to 6.5522.

Sweden’s government last month ruled out a fifth round of income tax cuts since coming to power five years ago in an effort to safeguard public finances. It expects balanced public finances next year and a 0.1 percent surplus of gross domestic product this year.

“It’s always important to cut taxes but it’s at least as important to have public finances in order,” Finance Minister Anders Borg said this week. “We are always careful when we see a slowdown which results in that we have great uncertainty surrounding public finances.”

--Editors: Jonas Bergman, Tasneem Brogger.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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