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ECONOMY

Riksbank holds interest rate at one percent

Sweden's benchmark interest rate will remain at one percent for longer than previously planned, the Riksbank announced on Wednesday citing the need to "support the recovery" in a time of timid economic development in the US and Asia, and less solid gains in Europe.

Published: 17 April 2013 09:44 CEST
Riksbank holds interest rate at one percent

“Growth prospects are gradually brightening, but at the same time the forecast is that it will now take longer before inflation attains the target of two percent,” the Riksbank said in a statement.

“The repo rate needs to remain at a low level for a longer period of time to support the recovery to ensure that inflation rises towards the target.”

Not only has the executive board of Sweden’s central bank decided to keep the repo rate at its current level, but it has said it expects to hold the rate at one percent for longer than initially expected. The Riksbank now predict it will not increase the repo rate until the second half of 2014 at the earliest.

The board cited the recovery of the global economy, with progress made in the US and Asia, while the Riksbank said it was keeping an attentive eye on the less solid recovery in the eurozone.

“There is still considerable uncertainty and GDP growth in the euro area is expected to remain weak,” the Riksbank statement read.

Developments at home appeared less gloomy, with the Riksbank keeping an eye on consumption and indebtedness.

“After a weak outcome at the end of last year, the Swedish economy is now showing a gradual recovery. Sentiment among households and companies has improved and consumption and investment are expected to increase more quickly in the coming period,” the statement read.

“Unemployment is still high, but the labour market is expected to improve next year when GDP growth picks up.”

The Riksbank said that Swedish inflation is currently low due to weak demand. The central bank pinned its hopes to increased economic activity but said it now believes it will take longer to hit the two percent target than it had predicted previously.

“This is partly because companies are now assessed to have more difficulty in passing on higher costs to consumer prices, and partly because of the stronger krona,” the Riksbank said in its decision to counter low inflation with the low one percent repo rate.

“Gradual increases in the repo rate are not expected to begin until the second half of 2014, which is around a year later than the earlier forecast.”

The statement went on to explain why the Riksbank will not lower the repo rate further than it stands today.

“The monetary policy conducted is expected to stimulate the economy and inflation at the same time as taking into account the risks linked to households’ high indebtedness.”

The Riksbank underlined, however, that its Wednesday statement was “a forecast, not a promise” and the repo rate could come to be adjusted differently than expected.

TT/The Local/at

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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