Riksbank Keeps Rates Unchanged as Deflation Threat Seen Fading
Bloomberg News
Sweden's central bank kept its main interest rate unchanged in a bet that an economic recovery will put an end to the threat of deflation.
The repurchase rate was held at 0.75 percent for a second meeting, the Stockholm-based bank said today in a statement. The move was predicted by 19 of 21 economists surveyed by Bloomberg, with two forecasting a cut. The bank sees the rate at 0.73 percent in the first quarter 2015, compared with an earlier forecast for 0.89 percent, and 1.95 percent at the start of 2016.
'Economic activity is clearly strengthening, but inflation is expected to remain low for some time,' the Riksbank said. 'Monetary policy needs to remain expansionary for inflation to rise towards the target.'
The bank cut rates in December to prevent deflation from taking hold as price growth has undershot its 2 percent target for more than two years. Policy makers, led by Governor Stefan Ingves, have been reluctant to ease policy as they balance falling prices against record consumer debt burdens.
The European Central Bank kept its rate unchanged at a record low of 0.25 percent last week and revealed it was considering quantitative easing to fight deflation as the 18-nation bloc emerges from its recession. Inflation in the euro area slid to 0.5 percent in March, the slowest pace since November 2009.
Falling Prices
While Swedish consumer prices fell on an annual basis in both January and February, there are indications the economy is picking up as an export slump eases. Sweden sells about half its $560 billion in output abroad, of which about 70 percent goes to Europe. Sweden's government today raised its outlook for growth to 2.7 percent this year, after a 1.5 percent expansion in 2013.
The economy, home to mobile network maker Ericsson AB and appliance maker Electrolux AB, grew a more-than-estimated 3.1 percent in the fourth quarter as consumers compensated for falling exports. Manufacturing (PMISSURV) expanded the most in two years last month and annual industrial production rose for a third month in four in February, following 14 consecutive months of declines.
The government of Prime Minister Fredrik Reinfeldt, which is trailing behind the Social Democrat-led opposition in polls ahead of September elections, this year lowered income taxes to boost demand. It was the fifth round of tax cuts since Reinfeldt came to power in 2006. The reductions, along with near-record low rates, have pushed home prices higher and added to household debt, which stands at more than 170 percent of disposable incomes. Apartment prices have more than doubled since 2000 after rising 11 percent last year.
Stricter Rules
The Riksbank has joined the government and the financial watchdog to work on stricter rules to halt a further build-up of consumer debt. The Swedish Bankers' Association last month recommended lenders force more borrowers to pay down their home loans following a string of measures to reduce debt.
The bank argues more regulation would allow it to focus less on debt and more on its inflation target. Opposition lawmakers have also argued that the Riksbank needs to focus more on the labor market.
Sweden's jobless rate was a seasonally-adjusted 8.1 percent in February compared with 6.7 percent when Reinfeldt's government was first elected in Sept. 2006.
To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net
To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net Tasneem Brogger
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