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FINANCIAL CRISIS

Sweden coming out of recession: Riksbank

“The deep recession has hit bottom, but the recovery will be weak", Sweden's deputy central bank governor Svante Öberg said in a speech made on Tuesday.

The bank’s monetary policy would continue to focus on dampening the effects of the recession, with the historically low benchmark interest rate set to remain at 0.25 percent for the coming year.

“The situation in the financial markets has improved and the new information received during the summer confirms the view that the deep recession has bottomed out,” said Öberg.

Öberg said the country’s GDP drop was unlikely to be as severe in 2009 as the Riksbank had initially predicted. In its July Monetary Policy Report, the central bank saw GDP plunging by more than 5 percent.

But Öberg stressed the the recovery would take some time time, with GDP not expected to reach pre-crisis levels until 2012.

The Riksbank stood by its prediction that unemployment would peak at 11 percent in 2011, although it was encouraged by employment figures in June that were marginally better than anticipated.

Inflation remains “much higher” in Sweden than in the EU but underlying inflation was “entirely in line with our forecast” and the krona has strengthened quicker than the central bank predicted at its July monetary policy meeting.

Öberg said Sweden was now benefiting from a policy of building up surpluses in its public finances and current account.

“[T]his is a much better situation than in many other countries, such as the United Kingdom, where public finances have also deteriorated substantially, but where they had a deficit to start with,” he said.

In summary, Öberg noted that “the new information received during the summer tends to point to a slightly stronger economic activity than we had forecast at the beginning of July.”

He added however that the Riksbank “will not make an overall assessment of economic developments until it is time for our next monetary policy decision on 2 September. It is likely that more information will have come in by then and we will have to update our forecasts.”

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ECONOMY

Riksbank deputy ‘open to reconsidering raising rates in April’

Martin Flodén, the deputy governor of Sweden's Riksbank, has questioned whether the central bank needs to bring in further rate rises in April, following bank runs on two niche banks in the US and a crisis of confidence at Credit Suisse.

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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