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Riksbank Sticks To Dovish Stance


Sweden's central bank retained its expansionary policy stance and signaled that more interest rate cuts could come in the near term despite a robust economy, given the heightened political uncertainty and a strong krona that is threatening to keep inflation off-target.

The bank also extended a mandate for Governor Stefan Ingves to carry out intervention in the foreign exchange market when warranted.

The Executive Board decided to hold the repo rate at -0.50 percent, the Riksbank said in a statement on Wednesday. The rate has been at this level since February 2016.

The repo rate path reflects the fact that there is still a greater probability that the rate will be cut than that it will be raised in the near term, and that slow increases will not begin until the start of 2018, the bank said.

The interest rate decision was in line with economists' expectations, who were slightly surprised by the bank's dovish stance. The krona weakened after the announcement.

"While the Riksbank maintained a very dovish tone today, the strength of the Swedish economy and rising inflationary pressures mean that the Bank will soon have to change its stance," Capital Economics economist Stephen Brown said.

"We expect the repo rate to be increased by the end of this year."

Policymakers also decided to continue purchases of government bonds for the first six months of 2017, as was decided in December.

The bank raised the repo rate outlook for the second quarter to -0.54 percent from -0.56 percent. The projection for the first quarter of next year was retained at -0.53 percent.

"Economic activity is strengthening, but there is considerable political uncertainty abroad and the risks of setbacks have increased," the bank said.

"For inflation to stabilize around 2 percent, a continued strong level of economic activity and a krona that does not appreciate too rapidly are required. Monetary policy therefore still needs to remain expansionary."

The bank noted that Deputy Governor Martin Floden entered a reservation against the decision to extend the mandate for interventions on the foreign exchange market, with the same motivation as given at the meetings in January, February and July 2016.

Though inflation moved closer to 2 percent in December, the Riksbank saw the upturn as temporary as it is led by the recent spike in energy prices. While the strong economy could aid in pushing price growth higher, inflation is not expected to stabilize around 2 percent until the end of 2018, the bank said.

The strong krona continue to complicate the picture of the development in inflation, the bank said, adding that the currency has been clearly stronger than expected since December. That said, the bank does not expect this rapid appreciation to continue.

by RTTNews Staff Writer

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