Sweden Cuts Interest Rate to 0%

At its October 28th meeting, the Riksbank decided to cut the repo rate by 0.25 percentage points to zero percent, aiming to fight low inflation. It is the lowest rate on record and it is not expected to rise until the middle of 2016.

The deposit rate is at the same time cut to -0.75 percent and the lending rate to 0.75 percent. The Executive Board has also decided that the interest-rate for fine-tuning transactions will be set at zero.

Statement by the Executive Board of the Riksbank:

Economic activity in the world as a whole is expected to continue to slowly improve but the difference between regions remains considerable. The economic outlook for the United States and the United Kingdom is good, while the recovery in the euro area is expected to be even slower than in previous assessments. The forecasts for inflation abroad are lower and several of the world's central banks are expected to continue to conduct very expansionary monetary policy for a further period of time.

In Sweden, economic activity is continuing to improve, primarily driven by good growth in household consumption and housing investment. Exports, which have been hampered by the relatively weak economic developments abroad, will increase more rapidly when economic activity improves in the countries Sweden trades with. The labour market will continue to strengthen in the years ahead and there will be a clear fall in unemployment.

Despite the fact that both GDP and employment have increased at a relatively good rate over the last 12 months, inflation has continued to be lower than expected. The broad downturn in inflation and the repeated downward revisions to the inflation forecast imply that underlying inflationary pressures are very low and lower than previously assessed. This, taken together with lower inflation and a weaker development of economic activity abroad, means that it is expected to take longer for inflation to reach 2 percent.

It is important that inflation rises towards the target of 2 percent. The repo rate is therefore being cut by 0.25 percentage points to zero percent. The low repo rate increases demand in the economy, which contributes to higher inflationary pressures. The highly-expansionary monetary policy may also contribute to keeping inflation expectations anchored around 2 percent by sending a clear signal that monetary policy is focused on inflation approaching the inflation target.

The repo rate needs to remain at this level until inflation has clearly picked up. Slow increases in the repo rate are expected to begin until the middle of 2016 and it should reach 1.75 percent towards the end of 2017. This is an unusually low repo rate at a time when economic activity is good, resource utilization is close to its normal level and CPIF inflation is 2 percent.

The fact that the repo rate is now being lowered further to get inflation to rise will increase the risks associated with high household indebtedness. It is therefore even more urgent now that these risks are managed. Reducing the risks requires measures aimed directly at household demand for credit. In addition, reforms are needed for a better-functioning housing market.

Sweden Cuts Interest Rate to 0%

Riksbank | Joana Taborda | joana.taborda@tradingeconomics.com
10/28/2014 8:45:46 AM