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Riksbank votes no to base rate hike

The Swedish Riksbank has decided to leave base (repo) interest rates unchanged at 0.25 percent, it was announced on Tuesday.

Published: 20 April 2010 09:31 CEST

Riksbank votes no to base rate hike

The Riksbank met on Monday to decide over whether to raise rates for the first time since just before the collapse of Lehman Brothers and the onset of the credit crunch in September 2008.

“The Executive Board of the Riksbank assesses that the repo rate needs to remain at a low level to support production and employment and to attain the inflation target,” the bank wrote in a statement on Tuesday.

The bank stated that the first rate hikes can be expected in “the summer or early autumn”.

The bank’s statement set an upbeat tone over the Swedish economy which is showing firm indications of recovery with a positive GDP forecast for 2010 on the back of a very weak 2009. The bank underlined that the low interest rate and expansionary fiscal policy will provide support to consumption, which has begun to increase.

The bank described the recovery in the labour markets as having come surprisingly early in the economic cycle.

“One sign that the Swedish economy is recovering is that employment has begun to increase and unemployment has stopped rising, which indicates a labour market turnaround.”

But it was noted that unemployment remained at a relatively high level with wage rises expected to remain accordingly low. Together with higher productivity and a stronger krona, inflationary pressures are forecast to remain relatively low over the coming years, the bank advised.

The bank left its forecast for inflation, GDP and the repo rate unchanged with the latter expected to return to 4 percent in the first quarter 2013.

Governor Stefan Ingves was unable to attend the meeting as he was in transit from Madrid, travelling overland due to the Swedish airspace shutdown.

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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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