Europe's news in English

COPY LINK

INTEREST RATE

Sweden cuts interest rate amid eurozone worries

Sweden's central bank cut the country's benchmark interest rate by 0.25 percent on Tuesday, at the same time signaling the rate would remain low throughout 2012.

Published: 20 December 2011 09:40 CET

Sweden cuts interest rate amid eurozone worries

Lower rates put more money in the pockets of Swedes with flexible rate mortgages

The rate, known as the repo rate, now stands at 1.75 percent.

In announcing the decision, the Riksbank cited uncertainty in the eurozone, as well as the dampening effects the sluggish European economies are expected to have on growth prospects in Sweden.

While Swedish economic growth was “strong” in 2011, according to the bank, there are signs that the economy is slowing down.

“There has been a fall in orders to Swedish export companies and exports will be much weaker next year,” the bank said in a statement.

“Households and companies will postpone their consumption and investment as a result of the poorer outlook.”

Weaker demand is also expected to result in higher unemployment in 2012, according to the Riksbank.

With eurozone worries and lower demand keeping inflationary pressures at bay, the Riksbank elected to cut Sweden’s interest rate by a quarter point.

In addition, the bank said it was lowering the repo-rate path, expecting rates to remain low throughout next year.

“Later on, when inflationary pressures increase, the repo rate will need to be raised gradually,” the bank said, emphasizing, however that there was “considerably uncertainty” about future economic developments.

“The public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy. In this situation, the repo-rate path may need to be lower,” the bank said.

“On the other hand, it is possible that confidence in the public finances of the euro countries will recover more quickly than expected.”

Member comments

Log in here to leave a comment.

Become a Member to leave a comment.

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.

Url copied to clipboard!