Sweden’s central bank kept its monetary policy stance unchanged along with its forecast for first raising the benchmark rate by mid-2018 despite a sharp hike in growth and inflation projections.
Sveriges Riksbank, which has maintained its benchmark repo rate at minus 0.50 percent since last cutting it in February 2016, confirmed its decision from April that it would continue to purchase government bonds during the second half of this year, pushing the total amount bought to 290 billion Swedish krona, excluding reinvestments.
Although Riksbank Governor Stefan Ingves said economic activity is “strong and inflation is close to the target of 2 percent,” he added cost pressures in the economy remain weak and it is important for inflation that the exchange rate of the krona doesn’t appreciate too quickly, which could happen if the Riksbank’s monetary policy deviated too far from other countries.
As in recent years, Ingves said the Riksbank was still prepared to ease its monetary policy further to stabilize inflation and needs to be expansionary to safeguard the role of the inflation target.
At the same time Ingves acknowledged low interest rates contribute to raising the risk from high household debt, adding this risk needs to be managed via housing, taxation and macro prudential policy.
The Riksbank raised its forecast for economic growth this year to 3.2 percent, the same rate as seen in 2016, from July’s forecast of 2.2 percent.
In the second quarter of this year Sweden’s Gross Domestic Product surged by a higher-than-expected annual rate of 4.0 percent, up from 2.3 percent in the first quarter.
For 2018 Sweden’s GDP is seen growing by 2.7 percent, up from 2.4 percent, and in 2019 by 2.0 percent, down from 2.1 percent.
The forecast for the repo rate was unchanged, with the first hike seen by the third quarter of next year to minus 0.40 percent, then to a positive 0.11 percent in the third quarter of 2019 and 0.62 percent by the third quarter of 2020.
The forecast for headline consumer price inflation this year was raised to 1.8 percent from a previous 1.6 percent and compared with 1.0 percent in 2016. In July inflation rose to 2.2 percent from 1.7 percent.
For 2018 inflation is seen averaging 2.1 percent, up from July’s forecast of 2.0 percent, and then averaging 2.9 percent in 2019.
As flagged by the Riksbank in recent months, the bank’s board officially adopted inflation as measured in terms of consumer prices with a fixed interest rate, or CPIF, as its formal target in contrast to the headline consumer price index, or CPI.
The change should not affect the conduct of monetary policy as the Riksbank has been using CPIF as its operational target for years, Ingves said.
The drawback of using CPI as a measure of inflation for monetary policy purposes is that any change to the bank’s interest rate directly affects the CPI through mortgage rates but this has nothing to do with the underlying inflationary pressures.
As part of the new target, the board also decided to use a variation band of 1 – 3 percent around CPIF to “illustrate that monetary policy is not able steer inflation in details, but that inflation normally varies around the target,” which remains 2.0 percent.
Ingves said the variation band illustrates in a simple way that inflation varies and will not be exactly 2 percent every single month, but added that the target remains 2 percent and the band was therefore not a so-called target range, which is used by some other central banks.
The Swedish krona has been weak against the euro since 2012, helping its export industry. But since late 2016 it has slowly been firming and was trading at 9.53 to the euro today, up 0.5 percent this year.
Sveriges Riksbank issued the following two statements:
Continued expansionary monetary policy for inflation close to the target
|CPI||1.0||1.8 (1.6)||2.1 (2.0)||2.9 (2.9)|
|CPIF||1.4||2.0 (1.8)||1.9 (1.7)||2.1 (2.0)|
|GDP||3.2||3.2 (2.2)||2.7 (2.4)||2.0 (2.1)|
ages 15-74, per cent
|6.9||6.7 (6.7)||6.5 (6.6)||6.5 (6.7)|
|Repo rate, per cent||-0.5||-0.5 (-0.5)||-0.4 (-0.4)||0.0 (0.0)|
|2017 Q2||2017 Q3||2017 Q4||2018 Q3||2019 Q3||2020 Q3|
|Repo rate||-0.50||-0.50 (-0.50)||-0.50 (-0.50)||-0.40 (-0.40)||0.11 (0.11)||0.62|