Sweden Holds Key Interest Rate at -0.5%

The central bank of Sweden held its benchmark interest rate at -0.5 percent on July 3rd, as widely expected, saying monetary policy needs to continue to be expansionary for inflation to remain close to target despite strong economic activity. Still, the central bank reiterated that slow repo rate rises will be initiated towards the end of the year.
Riksbank | Joana Ferreira | joana.ferreira@tradingeconomics.com 7/3/2018 7:48:13 AM
Excerpts from the Statement by the Executive Board of the Riksbank:

Economic developments abroad remain favourable. However, uncertainty over future developments has risen as a result of factors such as increased trade restrictions and economic policy developments in Italy. Inflation abroad is moderate but will rise this year due to higher oil prices. Normalisation of monetary policy abroad is taking place slowly.

In Sweden, economic activity is high, the labour market strong and inflation on target. As in other countries, higher energy prices have contributed to rising inflation. The krona exchange rate has developed more weakly than expected and together with more rapid energy price increases, this will contribute to higher inflation in the year ahead compared with in the previous assessment. In the longer term, however, the forecast for CPIF inflation is unchanged.

Measures of underlying inflation, which provide an indication of where inflation is heading, still suggest that inflationary pressures are moderate. For inflation to remain close to 2 per cent in the period ahead, it is important that economic activity continues to be strong and has an impact on price increases. The exchange rate is expected to strengthen gradually in the coming years but there is uncertainty surrounding the forecast. It is important that the krona exchange rate develops in a manner compatible with inflation remaining close to target.

Overall, the Executive Board deems it appropriate to keep monetary policy unchanged. The Executive Board has therefore decided to leave the repo rate at −0.50 per cent. The forecast for the repo rate is also unchanged and indicates as before that slow repo rate rises will be initiated towards the end of the year. The Riksbank's holdings of government bonds amount to about SEK 330 billion, expressed as a nominal amount. Until further notice, redemptions and coupon payments will be reinvested in the bond portfolio.

If the conditions for the development of inflation were to change, the Executive Board is prepared to adjust monetary policy. The risks of excessively low inflation merit particular attention, as at the prevailing interest rate levels, excessively low inflation is more difficult to manage than excessively high inflation.

The Executive Board has also decided to extend the mandate that facilitates rapid intervention on the foreign exchange market. The krona has weakened in the past year. But in the years ahead, it is expected to strengthen and the exchange rate remains a source of uncertainty as regards the development of inflation. An excessively rapid appreciation of the krona would make it more difficult to stabilise inflation.

The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. Achieving long-term sustainable development in the Swedish economy therefore requires measures within housing policy, taxation policy and, where necessary, macroprudential policy.

Sweden Holds Key Interest Rate at -0.5%