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FINANCIAL CRISIS

Riksbank halves interest rates

In a move that surprised many analysts, Sweden’s central bank has slashed its benchmark interest rate from 0.5 to 0.25 percent.

Published: 2 July 2009 09:57 CEST

Riksbank halves interest rates

In deciding to lower the rate once again, the Riksbank cited “very weak” economic activity abroad that has “hit Sweden hard”.

“Exports have fallen substantially and the situation on the labour market is continuing to deteriorate rapidly,” the bank said in a statement explaining the rate cut.

The Riksbank added that the economic downturn of 2009 has been “somewhat deeper” than what the bank had forecast back in April.

The bank’s decision to opt for further monetary policy expansion caught analysts unawares, with many believing that Sweden’s interest rate would remain unchanged.

“It’s surprising that the Riksbank did it again, especially when you considering the somewhat better figures that have come in,” said Henrik Mitelman, chief analyst with the SEB bank, to the TT news agency.

“The message to households and companies is that they can count on rates remaining more or less at zero for at least a year.”

While the Riksbank acknowledged there were signs of economic improvement, it argued that a lower interest rate, combined with Sweden’s current fiscal policy, would accelerate the nascent recovery.

The bank forecast positive GDP growth by 2010, but expected Sweden’s labour market to lag, with employment not likely to grow until 2011.

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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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