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Sweden leaves key interest rate unchanged

Sweden's central bank, the Riksbank, has left the country's benchmark interest rate, the repo rate, unchanged at 1.50 percent, but warned that the Swedish economic growth remains sluggish.

Published: 4 July 2012 10:57 CEST

Sweden leaves key interest rate unchanged

“The Executive Board of the Riksbank has decided to hold the repo rate unchanged at 1.50 per cent to support economic activity and ensure that inflation is in line with the target of 2 per cent,” said the Risksbank in a statement.

The Riksbank aims to keep the rate at this level for a year, until inflationary pressures increase, which will lead to a gradual rise from 1.50 percent.

The announcement comes at a time when Europe’s economy is in a period of unease, and Sweden’s economy is growing weakly, due to depressed Swedish exports and weak GDP growth that is expected to remain sluggish, along with slight rises in unemployment figures.

“The Swedish economy has developed more strongly than expected so far this year. Household consumption and corporate investment increased relatively strongly at the beginning of the year, while unemployment has been lower than expected,” the bank said.

When the unease in Europe abates, the bank expects a strengthened level of economic activity in Sweden, as well as increased inflation and resource utilization.

However, if problems persist in the euro area, the bank hinted that the repo-rate may be lowered.

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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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