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FINANCIAL CRISIS

Riksbank leaves interest rates unchanged

The Riksbank decided on Tuesday to leave the leave Sweden’s benchmark interest rate unchanged at 0.25 percent, but indicated that rate hikes were likely later in 2010.

Published: 16 December 2009 09:52 CET

In announcing its decision to leave the repo rate unchanged, Sweden’s central bank cited the continuing economic recovery and low inflationary pressures.

“The world economy is continuing to improve and this benefits economic developments in Sweden,” the bank said in a statement.

“Households and companies have become more optimistic regarding future developments and consumption is increasing.”

The bank revised its growth forecasts for 2010 upwards, now projecting Sweden’s economy will grow by 2.7 percent instead of the 2.5 percent forecast in October.

At the same time, however, the bank expected Sweden’s GDP to grow by only 3.5 percent in 2012, down from the previously forecast 3.7 percent.

The Riksbank added, however, that uncertainty remains, citing weak industrial production as one reason for continued caution regarding the pace of the current recovery.

The bank also left the forecast for the benchmark rate unchanged, saying that the repo rate would “remain at this low level until autumn 2010 and then to be raised towards more normal levels”.

In projecting the expected future interest rate path, the Riksbank said the repo rate will be close to 0.4 percent by the fourth quarter of 2010. A year later, it will have risen to around 2.4 percent before reaching 4.1 percent by the fourth quarter of 2012.

The future direction Sweden’s monetary policy will ultimately depend, however, on how economic developments abroad and in Sweden affect inflation and economic activity in Sweden, the bank added.

The Riksbank also noted that the labour market doesn’t appear as weak as in previous forecasts, but that unemployment is nevertheless expected to rise, which will keep inflationary pressures low for the coming year.

Inflation expectations were also lower in the bank’s new forecast, expected to reach 0.8 percent next year before jumping to 3.0 percent in 2011.

Earlier projections had inflation hitting 0.9 percent in 2010 and 3.3 percent in 2011.

The Riksbank board was not unanimous in its decision to hold rates at 0.25 percent, with Deputy Governor Lars E.O. Svensson advocating a further cut to 0.0 percent and a repo rate path 0.25 percent below the bank’s accepted scenario.

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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.

Published: 16 March 2023 16:20 CET
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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