Sweden raises rate 25 bps, delays next hike to H2 2019

     Sweden’s central bank raised its benchmark repo rate by 25 basis points to minus 0.25 percent as economic activity remains strong and inflation around its target but pushed back its forecast for the next rate hike to the second half of 2019 to cushion the effects of softer global growth.
     It is the first rate hike by Sveriges Riksbank since July 2011 but was expected by many analysts following the central bank’s statement in October the rate would be raised either this month or in February next year.
     ”As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly,” the Riksbank said.
     The Riksbank had kept its rate steady since ending an easing cycle in February 2016 but took a first small step toward normalizing its policy stance in December 2017 by letting its asset purchase program expire.
      The bond purchase program, known as quantitative easing, was first begun in February 2015 and the stock of assets reached 290 billion Swedish krona by the end of 2017. The Riksbank is still reinvesting the coupons and proceeds from maturing bonds “until further notice.”
      “The global economy, which has grown rapidly in recent years, is now entering a phase of more subdued GDP growth, which is in line with the Riksbank’s earlier forecasts,” the central bank said, adding there is still considerable uncertainty over the future, pointing to the effects of Britain’s exit from the European Union (EU) and the trade conflict between the United States and China.
     Sweden’s economy cooled in the third quarter of this year with gross domestic product actually shrinking by 0.2 percent from the second quarter for annual growth of 1.6 percent but this was mainly because households and companies brought forward vehicle purchases due to changes in taxes.
     The Riksbank said economic activity is still strong, sentiment in the corporate sector remains high and there are major shortages of labour, pushing up costs and inflation.
      It forecast economic growth this year of 2.2 percent, down from its October forecast of 2.3 percent, and lowered its 2019 growth forecast to 1.5 percent from 1.9 percent, reflecting a general softening of global growth and demand for Swedish exports.
     In 2020 and 2021 Sweden’s economy is seen expanding an unchanged 2.0 percent and 1.8 percent.
     To ensure strong economic growth, the Riksbank wants to keep its monetary policy expansionary and while inflation and inflation expectations are around its 2.0 percent target, it added that it has been lower  than expected recently, illustrating uncertainty over inflationary pressures.
     With the next interest rate increase seen in the second half of next year, the repo rate is forecast to average minus 0.2 next year, down from October’s forecast of minus 0.1 percent.
     ”The forecast for the repo rate therefore indicates that the next rate rise will probably occur during the second half of 2019,” the Riksbank said, adding after this the forecast shows approximately two rate rises per year by 25 basis points each time.
      For 2020 the repo rate is seen averaging 0.3 percent, down from 0.4 percent and then 0.8 percent in 2021, down from 1.0 percent.
      Headline inflation slowed in November to 2.0 percent from 2.3 percent in the previous two months and the Riksbank lowered its forecast for its favored measure of inflation – CPIF, or inflation with a fixed interest rate – to 1.9 percent next year from a previous 2.1 percent.
      For 2020 CPIF inflation is seen averaging 1.8 percent, down from 1.9 percent and then 2.0 percent in 2021.
     As in July and September, the Riksbank’s 6-member board was split in its decision. This time Deputy Governor Per Jansson voted against the rate hike, arguing there is considerable uncertainty over the strength of inflation and there was no need to raise the repo rate now.
     In July and September board members Henry Ohlsson and Martin Floden had wanted to raise the rates.

     Sveriges Riksbank released the following statement:

“Economic activity is strong and the conditions are good for inflation to remain close to the inflation target in the period ahead. As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly. The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent. The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019. With a repo rate of −0.25 per cent, monetary policy is still expansionary and will thereby continue to support economic activity.
Economic activity entering a more mature phase with rising cost pressures

Conditions remain good for inflation close to 2 per cent

Monetary policy needs to proceed cautiously

Important with measures to reduce the risks associated with household indebtedness