Sweden cuts repo rate 25 bps to avoid lower inflation

    Sweden’s central bank, the Riksbank, cut its benchmark repurchase rate by 25 basis points to 1.25 percent, a decision that was only expected by few economists, to prevent inflation from falling further as economic growth is being hit by Europe’s recession.
    The Riksbank, which already cut rates by 25 basis points in February, said the repurchase rate was expected to remain at this level until the middle of 2013, helping boost the economy and get the inflation rate back towards the bank’s target of 2 percent.
    “Growth in the Swedish economy is now slowing down after an unexpectedly strong outcome so far this year. During the summer the krona has appreciated faster than expected and productivity has also been unexpectedly high. Inflationary pressures are therefore expected to be lower than was forecast in July,” the Riksbank said in a statement.
    The Swedish economy expanded by an annual rate of 2.3 percent in the second quarter, up from 1.5 percent in the first, but the bank forecast that growth for the full year of 2012 would slow to 1.5 percent  and then 1.9 percent in 2013. In 2011 Sweden’s GDP expanded by 3.9 percent.

    The slowdown is mainly due to lower exports to Europe and this would lead to higher unemployment. But it added that the global economy was “growing at a good pace” and the U.S. economy was continuing to recover.
    “The situation in the euro area is still uncertain and could worsen, which could have further negative effects on the Swedish economy,” the Riksbank said.
    Sweden’s inflation rate fell to 0.70 percent in July, down from 1.0 percent in June and the krona has appreciated faster than expected and productivity has also been unexpectedly high.
    “All in all, this means that inflation will be lower in the coming period, compared with the assessment in July,” the bank said.
    The bank forecast that consumer prices would rise by an average of 1.2 percent in 2012 and 1.3 percent in 2013, down from 3.0 percent in 2011. In July the bank forecast 2012 inflation of 1.1 percent and 2013 inflation of 1.7 percent.
    “The Executive Board of the Riksbank has decided to cut the repo rate by 0.25 percentage points, to 1.25 per cent, to prevent inflation from being too low in the coming period. The repo rate is then expected to remain at this level until the middle of next year,” it added.
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