Bloomberg News

Sweden Holds Rate at 1.5% as Tightening Delayed

July 04, 2012

Sweden Leaves Rate at 1.5% as Tightening Plans Pushed Back

Sweden's Riksbank said in a statement, “Following a bright start to the year, the unease in Europe is now casting a shadow over the Swedish economy.” Photographer: Casper Hedberg/Bloomberg

Sweden’s Riksbank kept its benchmark interest rate unchanged and signaled it will delay plans to tighten monetary policy as the bank waits for firmer indications that Europe is emerging from its debt crisis.

The repo rate was left at 1.5 percent after being cut twice since December, the Stockholm-based central bank said in a statement published on its website today. The decision was predicted by 15 of the 20 economists surveyed by Bloomberg. The rest forecast a cut to 1.25 percent. The bank said it is revising “the repo-rate path downwards somewhat,” in the statement.

“Following a bright start to the year, the unease in Europe is now casting a shadow over the Swedish economy,” the bank said in the statement. “Despite the unease, the Swedish economy is still growing, albeit weakly. Inflation is low. The repo rate needs to remain low,” it said.

Riksbank board members Per Jansson and Kerstin af Jochnick said in May the bank is tracking developments in the euro area more closely than those in Sweden. The outcome of the currency bloc’s debt crisis is “decisive” for Sweden and has “steered discussions” at the central bank, Jansson said then. Sweden is a European Union member, though it has not adopted the euro.

The Riksbank also said it expects the krona to strengthen once the turmoil fueled by the crisis abates.

‘Unease’

“The unease that has marked the financial markets has led to major fluctuations on the foreign-exchange markets and the krona has weakened since the monetary policy meeting in April,” the bank said. “When the financial unease fades, it is expected that Sweden’s relatively good economic growth and sound public finances will lead to a gradual strengthening of the krona again.”

The krona extended its advance versus the euro, reaching the strongest level since December 2000. The currency appreciated as much as 0.5 percent to 8.697 per euro and was at 8.7048 at 10:46 a.m. London time.

According to Stockholm-based SEB AB, policy makers are signaling they’re unlikely to adjust monetary policy to respond to currency swings.

The “Riksbank is one of few Group of 10 central banks accepting a stronger currency,” as it targets a rate below 8.5 kronor to the euro next year, SEB said in a note. “Only levels materially below 8.50” against the euro “would force a more dovish Riksbank stance,” SEB said.

Euro Crisis

The Riksbank said its outlook was clouded by “considerable uncertainty concerning economic developments” and warned the “situation in the euro area is problematic and could worsen.”

In such an event, “the Riksbank will no doubt act forcefully, primarily through increased liquidity measures,” Anna Raman, a senior analyst at Nykredit A/S in Copenhagen, said in a note. “But in case of evident signs of a severe economic slowdown, the Riksbank will not hesitate to also cut its policy rate substantially.”

Euro-area leaders struggled to avert a deepening of the region’s debt crisis last week by easing the terms of Spain’s bank bailout and moving closer to a fiscal and financial union. The move sent Spanish and Italian bonds higher amid confidence the crisis won’t spin out of control. About half of Sweden’s economy comes from exports, 70 percent of which go to Europe.

‘Protracted’

“The economic downturn in the euro area is expected to be protracted,” the Riksbank said. “Several euro area countries are facing considerable challenges. The work on rectifying the problems is continuing but a lot of work remains before long-run sustainable solutions have been implemented.”

Still, a number of Sweden’s “most important” trade partners “are expected to keep growing, albeit at a slow rate,” the bank said.

The overall economy of the 17-member euro area will contract 0.3 percent this year, the European Commission said in May. Germany and the U.K., two of Sweden’s biggest export markets, will expand 0.7 percent and 0.5 percent, respectively, according to the commission.

The Riksbank now expects its repo rate to be at 1.4 percent in the fourth quarter, versus an April forecast for 1.5 percent. The rate will average 1.6 percent in the third quarter next year, versus a previous prediction for 1.8 percent. The benchmark will be 2.4 percent in the third quarter of 2014 and 3.1 percent a year later, according to the bank.

GDP Outlook

The bank raised its economic forecast for Sweden for this year to 0.6 percent growth from 0.4 percent, previously. The economy will expand 1.7 percent in 2013, compared with an April forecast for 1.9 percent, it said. Gross domestic product will expand 2.8 percent in 2014, it estimates.

The largest Nordic economy will avoid a recession this year as expansion slows to 0.7 percent from 3.9 percent in 2011, the National Institute of Economic Research said on June 20.

Sweden’s low public debt level compared with most other European countries gives the government room to maneuver should the economy deteriorate further, NIER said. The Finance Ministry predicts debt will fall to 37.7 percent of gross domestic product this year. That compares with an average of 91.8 percent in the euro area, the European Commission said on May 11.

Euro-area leaders agreed at their June 28-29 summit to drop the preferred status of taxpayers over bondholders in emergency loans for Spain’s troubled banks. The talks also cleared the way for direct bank recapitalization using rescue funds and the creation of a single financial supervisory authority as Europe hones its crisis-fighting tools.

ECB Rates

The European Central Bank will probably cut its main interest rate tomorrow for the first time since December, bringing the benchmark to 0.75 percent, according to 46 of the 62 economists surveyed by Bloomberg.

Traders and investors have increased bets that the Riksbank will also cut rates over the next year and now see the repo rate at 1.3 percent in 12 months, versus a 1.4 percent forecast in a May survey, TNS Sifo Prospera said on June 13. Interest rate futures show traders expect the Riksbank will lower its rate to 1.16 percent in December.

Growth returned to the Swedish economy in the first quarter after output contracted a quarterly 1 percent in the three months through December. Swedish annual retail sales unexpectedly grew at the fastest pace in more than a year in May, rising 4.6 percent, as NIER predicted unemployment will average 7.5 percent this year, unchanged from 2011. The jobless rate was 6.2 percent in 2007.

Inflation Lag

“Swedish economic growth and the labor market have been stronger than the Riksbank forecast and that normally weighs heavily on their decisions,” Hallberg at Swedbank said.

Swedish inflation has trailed the central bank’s 2 percent target every month this year after slowing for a third month to 1 percent in May. The data were followed by a survey indicating manufacturing contracted for a second month in June.

Unemployment unexpectedly rose to 8.1 percent in May from 7.8 percent the previous month. That sent consumer and manufacturing confidence lower in June after annual industrial production fell 6.2 percent in April, marking the third consecutive month of declines.

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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