Bloomberg News

Sweden Abandons Rate Rises as Euro Crisis Hits Nordics: Economy

February 16, 2012

Feb. 16 (Bloomberg) -- Sweden’s central bank abandoned interest rate increases for the rest of the year as Europe’s debt crisis extends its reach further north and policy makers warn weak exports are destroying jobs.

“Sluggish growth in the euro area has subdued demand for Swedish exports,” the Riksbank in Stockholm said today. “The weaker economic outlook has led households to begin saving more and postpone their consumption, while companies are postponing their investment. Unemployment will therefore increase somewhat during the year.”

The bank cut its benchmark repo rate by a quarter of a percentage point to 1.5 percent, and predicted the rate will remain at that level through the first quarter of next year. Before today, the bank had signaled the rate would average 1.8 percent at the beginning of next year.

The failure of Europe’s leaders to end the debt turmoil, now in its third year, is imperiling recovery prospects even in the region’s strongest economies. Swedish Finance Minister Anders Borg has lashed out at bailout-reliant Greece, the region’s most indebted nation, for prolonging the crisis by failing to meet the terms of its first rescue.

“The central bank is making clear that Swedish growth prospects have been weakened by the development abroad,” Rasmus Gudum, an economist at Svenska Handelsbanken AB in Copenhagen, said in a note. “It’s especially the euro area, which the bank notes has already hit Swedish exports significantly.”

Dangerous Fallout

Sweden’s trade surplus shrank to its narrowest in more than a year in December as exports fell for a third month. The 17- nation euro region shrank in the fourth quarter for the first time since 2009 as debt woes blunted demand.

Greece has yet to persuade other members in the euro-area to provide new loans to avoid bankruptcy, increasing the risk of a deepening global economic crisis. The fallout is proving dangerous to trade-reliant economies like Sweden. Exports make up half the nation’s $500 billion economy, while about 55 percent of its sales abroad go to the European Union.

The Riksbank cut its 2012 economic growth forecast to 0.7 percent today from 1.3 percent previously. Unemployment will reach 7.7 percent, versus an earlier estimate for 7.5 percent, the bank said.

The krona weakened 0.1 percent to 8.7984 per euro and 0.6 percent per dollar to 6.7635 as of 11:19 a.m. in Stockholm. The yield on Sweden’s two-year note fell four basis points to 0.975 percent.

Australian Jobs

Elsewhere, Australia added the most workers in 14 months in January and the jobless rate unexpectedly declined, spurring investors to increase bets that the country’s central bank will extend an interest-rate pause.

In Asia, a report today showed Singapore’s economy shrank less than initially estimated last quarter as a surge in pharmaceutical production supported manufacturing at year-end. Gross domestic product fell an annualized 2.5 percent from the previous three months.

In China, non-financial outbound investment rose 59.9 percent in January from a year earlier to $4.376 billion, the Ministry of Commerce said in Beijing today.

In the U.S., a report today may show that wholesale prices rebounded in January after an unexpected decline in December, according to the median estimate in a Bloomberg News survey of economists. Prices may have increased 0.4 percent from December after slipping 0.1 percent in November.

Global Outlook

American data on jobless claims and housing starts are also due today, along with the Bloomberg Consumer Comfort Index and the business outlook report from the Federal Reserve Bank of Philadelphia.

In Sweden, the Riksbank said the global economy “as a whole is growing at a relatively good rate and the U.S. economy has performed better than expected,” in today’s rate report. “However, growth prospects have deteriorated in large parts of the euro area, partly as a result of new consolidation measures and signs of a tighter credit situation.”

Sweden’s central bank cut rates in December for the first time in 2 1/2 years, reversing a tightening cycle that had ended two months earlier. Futures on Sweden’s repo rate before today’s decision indicated the Riksbank will cut its benchmark again this year.

Slow price growth is also giving policy makers in Stockholm more scope to ease rates. Inflation, adjusting for mortgage costs, has been below the central bank’s 2 percent target since January 2011 and was 0.9 percent in January, the statistics office said today.

Swedish Companies

Unemployment in Sweden, home to some of Europe’s biggest companies including wireless network maker Ericsson AB and truckmaker Volvo AB, jumped to 7.1 percent in December from 6.7 percent in November, non-seasonally adjusted figures published by Statistics Sweden showed on Jan. 26.

Swedish companies have signaled they’ll adjust to the weaker outlook by capping price increases and trimming their workforces. A Feb. 8 Riksbank survey of 24 of Sweden’s biggest firms representing about 200,000 employees showed that “companies believe they will need to make further job cuts in the period ahead” as the “economic outlook is expected to deteriorate further in the next six months.”

The central bank in neighboring Norway has also had to reverse last year’s tightening cycle and in December lowered its main rate by half a percentage point, its first such cut since May 2009. Policy makers in Oslo have signaled they’re willing to reduce rates further to prevent krone gains that hurt exporters.

The currencies of Norway and Sweden have strengthened this year as official rates remain above those in the euro area and the U.S. Even after easing policy, the Norwegian and Swedish central banks’ main rates are higher than the 1 percent in the euro region and a target of zero to 0.25 percent in the U.S.

--With assistance from Jonas Bergman in Oslo. Editors: Tasneem Brogger, Fergal O’Brien.

SWRRATEI %SEK

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

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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