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Sweden holds rate, easy policy remains to boost inflation

Wednesday, February 15, 2017 8:03
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(Before It's News)

    Sweden’s central bank maintained its monetary policy stance, as widely expected, saying its policy has to remain expansionary so economic activity remains strong and the exchange rate of the krona doesn’t appreciate too rapidly to ensure inflation stabilizes around its 2 percent target.
    Sveriges Riksbank, which cut its benchmark repo rate by 15 basis points 12 months ago to the current level of minus 0.50 percent, added its bond purchases will continue during the first half of this year, as was decided in December when it raised the total amount of bonds that will be bought by mid-year to 275 billion krona from around 245 billion end-2016.
    “Economic activity is strengthening, but there is considerable political uncertainty abroad and the risk of setbacks have increased,” the Riksbank said.
    Although it added there was still a greater probability of a rate cut than a rate rise in the near term, its forecast for the repo rate was slightly lower, with the rate now seen averaging 0.5 percent this year, down from December’s forecast of minus 0.6 percent.
     For 2018 the repo rate was seen rising to minus 0.3 percent, unchanged from December, and for 2019 it was seen rising to an average of 0.2 percent, also unchanged. For the first quarter of 2020 the rate was seen averaging 0.49 percent.
     But the central bank’s board underscored that it is still ready to make its policy more expansionary if the rise in inflation were threatened, adding it had extended its mandate that would allow it to intervene quickly on the foreign exchange markets if needed.
    “The krona exchange rate continues to create uncertainty about the development in inflation,” the Riksbank said, adding that it had been stronger than expected since December.
     Against the U.S. dollar, the krona fell sharply in 2014 and has weakened this month after rising  from mid-December through January.  In response to the Riksbank’s decision the krona fell and was trading at 8.98 to the U.S. dollar, down from 8.93 yesterday to be up 1.3 percent this year but down 5.8 percent since the start of 2016.
     But against the euro, the krona has appreciated since early November last year and was trading at 9.46 to the euro today, up 1.3 percent this year and up 5.3 percent since November 5.
     ”This rapid appreciation is not expected to continue, however,” the Riksbank said, adding it expects it to rise slowly as economic activity improves.
    Sweden’s headline inflation rate rose to 1.7 percent in December 2016 from 1.4 percent in November and the Riksbank raised its forecast for inflation to average 1.6 percent this year, up from its previous forecast of 1.4 percent.
     For 2018 inflation is seen averaging 2.1 percent, down from 2.2 percent, and for 2019 it is seen at 2.9 percent, down from 3.0 percent forecast in December.
     The outlook for economic growth remains strong, with growth seen at 2.5 percent this year, up slightly from its previous forecast of 2.4 percent. In 2016 Sweden’s economy was estimated to have expanded by 3.4 percent.
    For 2018 growth is seen unchanged at 2.2 percent and an unchanged 2.1 percent in 2019.

     Sveriges Riksbank issued the following statement:

“Economic activity is strengthening, but there is considerable political uncertainty abroad and the risks of setbacks have increased. For inflation to stabilise around 2 per cent, a continued strong level of economic activity and a krona that does not appreciate too rapidly are required. Monetary policy therefore still needs to remain expansionary. The Executive Board of the Riksbank has decided to hold the repo rate at −0.50 per cent and there is still a greater probability that the rate will be cut than that it will be raised in the near term. The purchases of government bonds will continue for the first six months of 2017, as was decided in December. The Executive Board has also taken a decision to extend the mandate that facilitates a quick intervention on the foreign exchange market.

Global recovery with the risk of setbacks

The economic outlook abroad is brighter in the near term, and the recovery is continuing in line with earlier forecasts. At the same time, there is considerable political uncertainty in several areas of the world, which means that the risks of setbacks have increased.

Economic activity in Sweden increasingly strong

In Sweden, the Riksbank’s expansionary monetary policy has contributed to high growth, falling unemployment, rising inflation and inflation expectations that are back at 2 per cent. CPIF inflation was close to 2 per cent in December, but the recent upturn has been primarily driven by a temporary rise in energy prices. Excluding energy prices, inflation is still low. The strong economic activity creates good conditions for inflation to continue rising. However, inflation is not expected to stabilise around 2 per cent until the end of 2018.
The krona exchange rate continues to create uncertainty about the development in inflation. Since December, the krona has been clearly stronger than expected. This rapid appreciation is not expected to continue, however. The Riksbank’s forecast is for the krona to appreciate slowly as economic activity improves.

Expansionary monetary policy for inflation to stabilise around 2 per cent

To ensure inflation stabilises around the target, it is necessary for economic activity to remain strong and for the krona to appreciate at a not too rapid pace. The political uncertainty abroad is enhancing the need for monetary policy to remain expansionary. The Executive Board has decided to hold the repo rate unchanged at -0.50 per cent. The repo rate path reflects the fact that there is still a greater probability that the rate will be cut than that it will be raised in the near term, and that slow increases will not begin until the start of 2018. Purchases of government bonds will continue for the first six months of 2017, as decided in December 2016. Until further notice, maturities and coupon payments will be reinvested in the government bond portfolio. The Executive Board has also taken a decision to extend the mandate that facilitates a quick intervention on the foreign exchange market.
The Executive Board is still prepared to make monetary policy more expansionary if the upward trend in inflation were to be threatened and confidence in the inflation target weakened. All of the tools that the Riksbank has described earlier, most recently in the September 2016 Monetary Policy Report, can as always be used if necessary.
Monetary policy needs to be expansionary to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation. But the low interest rate levels also entail risks, such as those linked to the high and increasing household indebtedness. To achieve long-term sustainable development in the Swedish economy, these risks need to be managed via targeted measures within housing policy, fiscal policy and macroprudential policy.
FORECASTSFOR SWEDISH INFLATION, GDP, UNEMPLOYMENT AND THE REPO RATE*
  2015 2016 2017 2018 2019
CPI 0.0 1.0 (1.0) 1.6 (1.4) 2.1 (2.2) 2.9 (3.0)
CPIF 0.9 1.4 (1.4) 1.7 (1.6) 1.8 (1.9) 2.1 (2.1)
GDP 4.1 3.4 (3.4) 2.5 (2.4) 2.2 (2.2) 2.1 (2.1)
Unemployment,
ages 15-74, per cent
7.4 6.9 (6.9)  6.7 (6.7) 6.7 (6.7) 6.7 (6.7)
Repo rate, per cent -0.3 -0.5 (-0.5) -0.5 (-0.6) -0.3 (-0.3) 0.2 (0.2)
*Annual percentage change, annual average
Note. The assessment in the Monetary Policy Report in December 2016 is shown in brackets.
Sources: Statistics Sweden and the Riksbank
FORECAST FOR THE REPO RATE*
  2016 Q4 2017 Q1 2017 Q2 2018 Q1 2019 Q1 2020 Q1
Repo rate -0.50 -0.50 (-0.53) -0.54 (-0.56)  -0.53 (-0.53)  -0.02 (-0.02)  0.49
*Per cent, quarterly averages
Note. The assessment in the Monetary Policy Report in December 2016 is shown in brackets.
Source: The Riksbank
Deputy Governor Martin Flodén entered a reservation against the decision to extend the mandate for interventions on the foreign exchange market, with the same motivation as given at the meetings in January, February and July 2016.
The decision on the repo rate will apply with effect from 22 February. The minutes from the Executive Board’s monetary policy discussion will be published on 1 March. Further information on the Executive Board’s decision on the mandate for foreign exchange interventions can be found in a separate annex to the minutes at www.riksbank.se. A press conference with Governor Stefan Ingves and Mattias Erlandsson, Acting Deputy Head of the Monetary Policy Department, will be held today at 11 a.m. at the Riksbank. Press cards must be shown. The press conference will be webcast live at www.riksbank.se.”


Source: http://www.centralbanknews.info/2017/02/sweden-holds-rate-easy-policy-remains.html

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