Sweden: Riksbank keeps rates unchanged in December
December 17, 2015
At its 15 December Monetary Policy meeting, the Swedish Central Bank (Riksbank) left its main policy rate, the repo rate, unchanged at its current unprecedented low of minus 0.35%. The Bank also refrained from adding to the stimulus package that it embarked on in February this year. The current position of the government bond purchasing program sees SEK 200 billion worth of security purchases to be made by the end of June 2016. Although Riksbank maintained it stance in December, it emphasized that it remains poised to act, even at irregular intervals between scheduled policy rate meetings, should inflation deviate from the forecasted path.
The overlying sentiment of the accompanying press release was that the Bank remained cautious regarding the future inflation path, however, the risks associated with further policy easing outweighed any potential gains regarding inflation. Nevertheless, the unorthodox policy stance that is in place remains very expansionary, and Riksbank has on a number of occasions highlighted the risk associated with such a stance, particularly, high household indebtedness. Riksbank employed strong language in its press release as it reiterated the importance of sound macro-prudential policy that could mitigate the imbalances created by the negative interest rate environment and the quantitative easing program. Regarding household debt, the Bank stated that, “in order to reduce the risks of household indebtedness, different reforms are needed that both create a better balance between supply and demand on the housing market and reduce the incentives for households to take on debt.”
Compared to its Nordic neighbors and the rest of the Eurozone, Sweden has experienced stronger-than-expected growth in the last months of 2015. Adding to this, Riksbank anticipates a positive shock to both public and private consumption on the back of the influx of asylum seekers. The impact of the roughly 190 thousand migrants arriving this year into a country with a population of only 11 million is going to be considerable. Riksbank estimates that the increases in public consumption associated with the recent influx could boost GDP growth by 0.2%, however, the aggregate effect on growth is more difficult to quantify.
Riksbank’s principal concern remains inflation, and given that inflation has been very mild in the past three months, the Bank is ready to act if the nascent recovery in prices becomes jeopardized. The krona has depreciated through the year and this has helped to stabilize the fall in consumer prices. However, the Bank expects the krona’s contribution to inflation to abate in 2016, and the bank is looking to support domestic inflation in 2016. The Bank stated that should the krona appreciate too quickly, it could compromise inflation and therefore the Bank stated it would be prepared to intervene in FX markets in order to avoid an earlier than expect appreciation.
Finally, Riksbank reiterated that it is fully committed to ensuring that inflation rises closer to its 2.0% target and that it is prepared to make further moves if necessary. This includes the increased likelihood of additional rate cuts and an extension of government bond purchases. The next policy meeting is scheduled to be held on 11 February.
Author: Robert Hill, Economist