Sweden's Riksbank Signals

21 February, 2019

The Swedish central bank held its monetary policy meeting last week where it left the key interest rates unchanged at -0.25 percent.

The central bank, however, affirmed its intention that it would raise rates once again anytime during the second half of the year despite some “significant uncertainty” about the global economy.

The Riksbank’s executive board voted to hold the repo rates unchanged at -0.25% the Riksbank’s statement showed on Wednesday last week. The decision was in line with the economist’s expectations.

“The forecast for the repo rate indicates that the next increase will be during the second half of 2019, provided that the economic outlook and inflation prospects are as expected,” the Riksbank said in its previous statement in December when it hiked interest rates by a quarter basis point bring Sweden’s interest rates from -0.50% to -0.25%.

Officials, however, said that the central bank was in no rush to push for tighter monetary policy and noted that future rate hikes would come at a slow pace. It said that interest rates need to probably rise twice a year at a quarter basis point each.

The Swedish krona has been steadily declining since early this year but managed to strengthen against the euro following the Riksbank’s statement.

However, the SEK is unlikely to exhibit further strength against the euro. Due to the anticipated slowdown in the global economy, the Riksbank is likely to push for one more rate hike.

Economists forecast that Sweden’s interest rates will remain near zero percent until the end of this year and into next year.

Riksbank lowers growth outlook, and inflation forecasts remain unchanged

The Riksbank trimmed its outlook for growth projections to account for the weaker outlook. Policy makers said that the Swedish economy would expand at a pace of 1.3% this year. This represents a slower pace of projection compared to the 1.5% increase it forecast in December last year.

For the next year, Sweden expects growth to average around 1.9%. This is less compared to the previously projected 2% growth rate for 2020.

The central bank remained muted on the inflation outlook. However, it noted that the conditions for inflation to rise remain good. It expects inflation to keep close to the central bank’s target rate in the coming years.

“The strong economic activity and rising cost pressures both in Sweden and abroad mean that the conditions are good for inflation to remain close to the target in the coming years,” Riksbank said in its statement.

The Riksbank also noted that the outlook did not change much for inflation since the December monetary policy meeting. However, officials are likely to proceed with caution as several factors could affect inflation.

The central bank raised its inflation forecast to 2.0% for this year. This is up from 1.9% previously while leaving the inflation forecasts unchanged at 1.9% for next year.

Sweden’s first rate hike unexpectedly came in December last year. It was the first rate hike since 2011 after interest rates remained negative since 2015.

The December rate hike was a split decision with the Riksbank’s deputy governor, Per Jansson. He expressed reservations on the decision to raise the repo rates. He was not in favor of the rate hike.

Jansson did not participate in the February monetary policy meeting due to personal reasons.

Riksbank does not renew the FX intervention mandate

The central bank interestingly did not renew its FX intervention mandate that expired last week. The decision suggests that the central bank is moving away from focusing on the SEK’s exchange rate. Also, it concerns less on the appreciating exchange rate in the currency.

The central bank’s decision comes as concerns of a keen appreciation of the currency receded.

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