Bloomberg News

Sweden’s Central Bank Cuts Main Rate to Ward Off Recession

February 16, 2012

(Updates with analyst comments in fifth paragraph, forecasts in 10th and 11th.)

Feb. 16 (Bloomberg) -- Sweden’s central bank cut its main interest rate and forecast unchanged borrowing costs over the next year to ward off a recession in the largest Nordic economy as Europe’s debt crisis erodes export demand.

Policy makers lowered the repo rate by a quarter of a percentage point to 1.5 percent, the Stockholm-based bank said today. The move was predicted by 13 of the 18 economists surveyed by Bloomberg. The bank indicated it will keep rates unchanged until the first quarter next year.

“Sluggish growth in the euro area has subdued the demand for Swedish exports, which slowed down significantly in late 2011,” the Riksbank said. “The weaker economic outlook has led the households to begin saving more and to postpone their consumption, while the companies are postponing their investment.”

The failure of Europe’s leaders to end the debt crisis is imperiling recovery prospects even in the region’s strongest economies. Sweden’s trade surplus shrank to its narrowest in more than a year at the end of 2011 as exports fell for a third month in December. The 17-nation euro region shrank at the end of 2011 for the first time since 2009, as debt woes blunted demand. Swedish Finance Minister Anders Borg has lashed out at Greece for prolonging the crisis by failing to meet the terms of its first bailout.

Room to Stimulate

“We have ended up with slower growth in 2012, and now that unemployment is edging upwards and most of all inflation is low there is room to stimulate the economy,” said Knut Hallberg, an analyst at Swedbank AB. The bank will probably cut its rate at its meetings in April and July, reaching 1 percent, he said.

Swedish consumer prices rose an annual 1.9 percent last month, slowing from 2.3 percent in December, Statistics Sweden said today. That’s the lowest in more than a year and below both analyst estimates and the Riksbank’s 2 percent target.

Deputy Governors Karolina Ekholm and Lars E.O. Svensson both entered reservations and advocated a cut to 1.25 percent and a lower repo rate path, the bank said.

The krona weakened 0.1 percent to 8.7989 per euro and 0.6 percent to 6.7642 per dollar as of 11:25 a.m. in Stockholm. The yield on Sweden’s two-year note fell three basis points to 0.98 percent.

Growth Forecasts

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 likely to hurt trade-reliant economies. Exports make up half of Sweden’s $500 billion economy, while about 55 percent of its sales abroad go to the European Union.

The Riksbank today cut its economic growth forecast to 0.7 percent this year from 1.3 percent and to 2.1 percent in 2013 from 2.3 percent. Inflation will average 1.4 percent this year and 1.9 percent in 2013 and unemployment will rise to an average 7.7 percent 2012 from 7.5 percent in 2011, it said.

The 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 rate to 1.3 percent by September.

Unemployment Rising

Slow price growth is also giving policy makers more scope to ease policy. Inflation, adjusting for mortgage costs, has lagged behind the central bank’s 2 percent target since January 2011 and was 0.9 percent last month.

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.”

Norwegian Neighbors

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.

Sweden’s krona has strengthened 1.7 percent against the euro this year, while Norway’s krone is up 2.5 percent versus the single currency in the same period. Strong currencies underline the need for the two countries’ central banks to cut rates to protect exporters, BNP’s Kara said.

--Editors: Tasneem Brogger, Jonas Bergman.

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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