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FINANCIAL CRISIS

Riksbank lowers repo rate by half point

The Riksbank decided on Wednesday to cut Sweden’s benchmark interest rate, the repo rate, by 0.50 percentage points to 4.25 percent as a part of a coordinated effort by several central banks.

Published: 8 October 2008 13:22 CEST

Riksbank lowers repo rate by half point

In addition to the Riksbank, the Bank of Canada, the Bank of England, the European Central Bank, the US Federal Reserve, and the Swiss National Bank all announced they would be lowering interest rates.

“Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices,” the banks said in a joint statement.

“The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.”

The Riksbank added that is believed Sweden’s economy was slowing down and inflationary pressures were dampening as a result of the financial crisis.

“The labour market is also showing clearer signs of weakening. The downturn in economic activity and lower oil and other commodity prices indicate that inflationary pressures will be lower in the future,” said the Riksbank.

“The fact that the cut is a joint action together with other central banks increases confidence and the likelihood that it will have positive effects.”

The Riksbank said it will offer more detailed analyses and forecasts following its next scheduled monetary policy meeting on October 22nd.

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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