Swedish households can count on lower interest rates for another couple of years after the Riksbank and its governor, Stefan Ingves, presented the first monetary policy forecast and interest rate announcement of the year yesterday.
The Riksbank highlighted a number of uncertainties in Europe, for example the economic effect of Brexit and forthcoming elections in the Netherlands, France and Germany. Ingves also warned of residual problems concerning toxic loans in European banks.
The bank has decided to extend the mandate which facilitates quick intervention on the currency market. However the forecast is based on a more stable series of events with inflation and interest rates normalising at a steady rate. The key interest rate remains unchanged at a negative 0.5 per cent and the new forecast states that a further lowering of the repo rate to -0.6 per cent is more likely than it being raised.
The Riksbank said on Wednesday that it would leave its benchmark repo rate unchanged at a negative 0.50 per cent and that its bond purchase programme was running to plan.
Governor Stefan Ingves does not believe the central bank’s expansive monetary policy is overheating the economy. “Not as far as we can see at present. We believe inflation will reach 2 per cent sometime next year, we believe growth will be healthy in the coming years and unemployment will fall,” he has said to Svenska Dagbladet.
He reiterated his warning that low interest rates increase the risks associated with high levels of household debt and called for political measures to be taken.
He also said he would have no qualms about raising interest rates when the time was right, even if a number of households would find an increase problematic.
The risk that low inflation could become entrenched caused the Riksbank to cut its repo rate by 15 basis points to -0.5 percent on Thursday. The central bank is no longer speaking of a “clear upward trend” in inflation, instead stating that it is “not yet on solid ground”.
The Riksbank said that the economy continues to strengthen but inflation is expected to be lower in 2016 than was previously forecast. The period of low inflation will therefore be longer. This increases the risk of weakening confidence in the inflation target and of inflation not rising towards the target as expected, and the bank is prepared to make monetary policy even more expansionary, if needed.
Swedbank noted that the central bank’s credibility is at stake, thereof Thursday’s cut in the repo rate. “… the Riksbank could have cut the rate in December, and since then most of the information has been negative, not least the inflation outcome,” said the bank.
SEB underlined that the Riksbank decision was not unanimous and that there are indications that Sweden is beginning to approach the limit of the super-expansionary policy.
Sweden’s central bank, the Riksbank, has kept its benchmark interest rate, the repo rate, at a record low of -0.35 per cent, but says it is ready to do more if needed. Market reaction was muted yesterday although the Swedish krona strengthened against the euro.
In a press release, the Riksbank said it had upwardly revised its forecast for GDP growth to 3.7 per cent this year and 3.6 per cent in 2016, as a result of strong economic activity.
However, the housing market is “out of balance” and it is of the utmost importance that the measures are taken to create a better balance between supply and demand, and reduce the incentives for households to take on debt, the bank said (ed.).
The Riksbank has held its benchmark repo rate unchanged at a negative 0.35% and has said it will expand its bond buying programme by SKr 65 billion to a total of SKr 200 billion.
The central bank expects to keep the repo rate low until 2017 even though inflation is showing a clear upward trend. However, there is still considerable uncertainty regarding the strength of the global economy and central banks abroad are expected to pursue an expansionary monetary policy for a longer time.
Negative interest rates will continue to have an impact on house prices, and Riksbank Governor Stefan Ingves yesterday reiterated that the Swedish housing market is “out of balance”, and that politicians must ensure that an amortisation requirement is put in place.
Sweden’s Riksbank announced on Thursday that it was leaving the repo rate on hold at -0.35% but was prepared to make monetary policy even more expansionary, if necessary.
“In the desperate hunt for inflation the Riksbank is leaving no stone unturned …. The autopilot is switched on at 2% inflation and the cure is negative interest rates in a country with annual growth of more than 3%,” comments business daily Dagen Industri’s Henrik Mitelman today.
The Riksbank is doing everything in its power to keep the Swedish krona weak. The stronger the currency, the lower the Consumer Price Index – and the bank wishes to avoid that at all costs, he suggests.
Mitelman believes that the Riksbank has painted itself into a corner, prepared to cut interest rates further. What the bank has failed to bear in mind is that interest rates in negative territory will only lead to even higher levels of household debt. Furthermore, the bank’s governors are oblivious to the fact that they are the ones who are so carefully laying the groundwork for the next financial crisis, he concludes.