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INTEREST RATES

Borg forecasts major interest rate cut

Sweden's Finance Minister Anders Borg has predicted that the Riksbank will cut its benchmark interest rate over the next year to a level much lower than that anticipated by analysts.

Published: 11 September 2008 18:52 CEST

Citing a reduction in social contribution fees paid by employers as the main cause, Borg said he expected the repo rate to fall from today’s 4.75 percent to 3 percent a year from now.

The Finance Department expects the rate to level out in 2010 at 3.25 percent.

“This is connected to the fact that we have budgeted for lower social contribution fees, which will affect wage costs by one percentage point in 2009. This in turn will have an effect on underlying inflationary pressures,” Borg told news agency TT.

The Finance Minister explained that proposed lower charges for employers could be regarded as equivalent to a one percentage point cut in wage levels agreed on in the most recent round of collective bargaining.

Mortgage holders with variable exchange rates are expected to be among the main beneficiaries should the Riksbank choose to heed Borg’s prediction.

The Swedish central bank has so far not indicated a drop anything like as precipitous as that advocated by Borg. In its most recent statement on the matter, the Riksbank said it expected the repo rate to fall to 4.3 percent by the third quarter of 2010.

The National Institute of Economic Research (Konjunkturinstitutet) is trading the middle ground between the minister and the central bank. It expects the Riksbank to cut the repo rate to 3.75 percent in 2009 and 3.50 percent in 2010.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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