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Sweden Keeps Key Rate At Zero

riksbank 021517 12feb20 lt

Sweden's central bank maintained its key interest rate, after lifting it from negative territory in December, and signaled that rates will remain zero for a prolonged period.

The Executive Board of Riksbank decided to keep its repo rate unchanged at zero percent, as widely expected, on Wednesday.

The repo rate remained negative since the start of 2015 until December 2019, when it was raised by 25 basis points to the current level.

The forecast for the repo rate was also the same as projected in December. The repo rate is expected to remain at zero percent during almost the entire forecast period, the bank said.

The chances of a rate cut in the near-term seem fairly low, James Smith and Petr Krpata, economists at ING, said. Barring a material worsening in the outlook, policymakers will be wary of taking the repo rate into negative again so soon after raising it.

The central bank will continue to purchase government bonds for a total nominal amount of SEK 45 billion, until December 2020.

Policymakers said the unusually mild winter and lower oil prices are contributing to falling energy prices, keeping inflation low in 2020.

The bank downgraded its inflation outlook for 2020 to 1.4 percent from 1.8 percent and kept the projection for 2021 at 1.8 percent, and that for 2022 at 2.1 percent.

At the same time, the bank lifted its growth projection for this year to 1.3 percent from 1.2 percent and that for 2021 to 1.8 percent from 1.7 percent. GDP is forecast to grow 2 percent in 2022 versus the previous forecast of 1.9 percent.

According to Riksbank, GDP growth will be moderate this year and then increase gradually from the end of 2020 when demand abroad stabilizes at the same time as investment and consumption in Sweden increase slightly more rapidly.

"The effects of the coronavirus are expected to reduce global growth in the short term, but it is difficult at present to fully assess the economic consequences," Riksbank said.

The board assessed that measures within housing and tax policy and appropriate macroprudential policy are required to reduce the risks associated with high household indebtedness.

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