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FINANCIAL CRISIS

Riksbank to cut rates next week: poll

Analysts in Sweden are predicting that the country's central bank will cut rates next week in a bid to alleviate market concerns and ward off an economic slowdown.

Published: 17 October 2008 15:04 CEST

Riksbank to cut rates next week: poll

Ten out of 19 analysts polled by Reuters on Friday forecast a quarter percentage point cut to 4 percent, while the others saw the bank on hold. Meanwhile, market players said forward rates indicated markets had fully priced in a cut.

“More than 25 points is priced for in next week. It’s 50/50 whether it will be 25 or 50 basis points,” said Torbjörn Isaksson, analyst at Nordea.

The Riksbank’s next monetary policy meeting is on October 22nd, with the announcement and a monetary policy report released the day after. The final announcement of the year is on December 17th.

On October 8th, the bank cut rates half a point, joining many central banks around the globe in an emergency coordinated move to soften the blow from a widening and deepening crisis.

Early in September — days before the collapse of US investment bank Lehman Brothers sparked a plunge in the world’s financial markets — the Riksbank raised rates for the 13th time since 2006 to address stubbornly high inflation.

Analysts said at that time the hiking cycle was over. But as late as September

25th the majority view in a poll was that rates would start to come down only in

2009.

Swedish annual consumer price inflation has been above the central bank’s 3 percent maximum tolerance level since November 2007. In September, it was

4.4 percent.

The export-dependent country’s once-booming economy has slowed sharply this year, with second-quarter growth a meagre 0.6 percent, and the global crisis has begun hitting the jobs market.

Sweden has taken steps to boost confidence and ease liquidity strains in the financial sector but policymakers and banks have said the banks are solvent and better-equipped than overseas peers to weather the financial storm.

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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