Sveriges Riksbank, which cut its rate by 15 basis points in February, will purchase another 30 billion Swedish krona of bonds in the first half of 2017, raising the total amount of bonds it will have bought by mid-2017 to 275 billion krona from an estimated 245 billion at the end of this year.
During 2017 the central bank will also reinvest around 30 billion krona from coupons and from bonds that mature, including a large maturity in August.
Although financial markets had expected another round of bond purchases, some investors had also expected the Riksbank to cut its rate, leading to a jump in the krona's exchange rate.
Another reason for the rise in the krona may be that three of the executive board's six members - Martin Floden, Henry Ohlsson and Cecilia Skingsley - had reservations about the extension of the bond purchases. Floden wanted additional purchases of only 15 billion krona while Ohlsson and Skingsley didn't see the need to make the monetary policy more expansionary.
In an update to its forecasts, the Riksbank maintained its forecast for the repo rate to first start to rise at the start of 2018 and underscored that "there is still a greater probability that the rate will be cut than that it will be raised in the near term."
The Riksbank expects the repo rate to average minus 0.6 percent next year, up from minus 0.5 percent this year, and then rise to minus 0.3 percent in 2018 and turn a positive 0.2 percent by 2019. This forecast is unchanged from its October forecast.
Reflecting the strong economic growth that Sweden is experiencing, the Riksbank raised its forecast for Gross Domestic Product growth this year to 3.4 percent from a previous 3.3 percent and the 2017 forecast to 2.4 percent from 2.0 percent. In 2015 the economy grew by 4.1 percent.
For 2018 growth is then expected to ease to 2.2 percent compared with 2.4 percent forecast in October and then to 2.1 percent in 2019, down from 2.2 percent.
In the third quarter of this year, Sweden's GDP grew by an annual rate of 2.8 percent in the third quarter, down from 3.6 percent in the second quarter.
Although Sweden's headline inflation rate rose to 1.4 percent in November from 1.2 percent in October for the fastest rate since March 2012, the Riksbank said inflation had been lower than it had expected in recent months and "there are still risks that can jeopardize the upturn in inflation."
The Riksbank said it was difficult to know how the krona would develop when the European Central Bank's (ECB) earlier this month extended its asset purchase program by another 9 months while the U.S. Federal Reserve's then decided to raise its rate.
"An overly rapid appreciation of the krona could dampen import prices and the demand for Swedish exports and make it more difficult to bring up inflation," the central bank said, adding it expects to krona to rise slowly in the period ahead.
The Riksbank largely maintained its inflation forecast, seeing consumer price inflation averaging 1.4 percent next year, unchanged from October, and 2.2 percent in 2018, also unchanged. The Riksbank targets inflation of 2.0 percent.
For 2019 inflation is seen rising to 3.0 percent, up from 2.9 percent previously forecast.
The Swedish krona has been depreciating steadily against the euro since April 2013 with the decline accelerating since June.
Following the Riksbank's policy statement on Oct. 27, the krona hit a low not seen since 2010 as it surprised financial markets by pushing back the time frame for maintaining its ultra-easy policy stance by another six months and said it was ready to extend the purchase of government bonds beyond the second half of 2016 and such a decision could be taken prior to its policy meeting in December.
Today the krona was trading at 9.65 to the euro, up from 9.73 yesterday but down 4.8 percent this year.
Sveriges Riksbank issued the following statement:
"Increasingly strong economic activity creates the conditions for inflation to continue rising. But there are risks that can jeopardise the upturn in inflation. Monetary policy therefore needs to remain very expansionary. The Executive Board of the Riksbank has decided to continue purchasing government bonds during the first six months of 2017, both nominal and real bonds, each corresponding to SEK 15 billion. The repo rate is retained 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. Increases in the repo rate are not expected to begin until the beginning of 2018.
Correction: The first sentence in the fifth paragraph should read "The Executive Board is still prepared to make monetary policy (...)."
Brighter economic prospects
The outlook for economic activity in Sweden and abroad has on the whole improved somewhat since the assessment made in October. The international recovery is expected to continue in the coming years, and global inflation is expected to rise from low levels.
The Riksbank's expansionary monetary policy has had a broad impact and pushed down interest rates in the Swedish economy. Monetary policy has thus contributed to the positive development in the Swedish economy in recent years, with high growth, falling unemployment and rising inflation. Long-term inflation expectations are also close to 2 per cent. The increasingly strong economic activity means there are good conditions for inflation to continue rising.
Risks to the upturn in inflation
But there are still risks that can jeopardise the upturn in inflation. Inflation has been lower than expected in recent months, and it is still uncertain how quickly it will rise going forward. It is difficult to know, for instance, how the krona exchange rate will develop in an environment where the ECB has extended its asset purchase programme and the Federal Reserve has raised its policy rate. The Riksbank assesses that the krona will strengthen slowly in the period ahead. An overly rapid appreciation of the krona could dampen import prices and the demand for Swedish exports and make it more difficult to bring up inflation.
Continued strong support from monetary policy
Monetary policy needs to remain very expansionary for inflation to rise towards 2 per cent. 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. Increases in the repo rate are not expected to begin until the beginning of 2018. To further support inflation, the Executive Board has also decided to extend the purchases of government bonds by SEK 30 billion during the first half of 2017. The purchases include both nominal and real government bonds, corresponding to SEK 15 and SEK 15 billion, respectively. Until further notice, maturities and coupon payments on the government bond portfolio will be reinvested, during 2017 to a value of around SEK 30 billion. There will be a large maturity in August, but reinvestments will begin at the beginning of 2017 and are planned to continue throughout the year. In the middle of 2017, the Riksbank's purchases will amount to SEK 275 billion, excluding reinvestments.
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 in earlier Monetary Policy Reports, most recently in September, can still be used.
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 increased 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.
| 2015 | 2016 | 2017 | 2018 | 2019 | |
|---|---|---|---|---|---|
| CPI | 0.0 | 1.0 (1.0) | 1.4 (1.4) | 2.2 (2.2) | 3.0 (2.9) |
| CPIF | 0.9 | 1.4 (1.4) | 1.6 (1.6) | 1.9 (1.9) | 2.1 (2.1) |
| GDP | 4.1 | 3.4 (3.3) | 2.4 (2.0) | 2.2 (2.4) | 2.1 (2.2) |
| 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) | -0.6 (-0.6) | -0.3 (-0.3) | 0.2 (0.2) |
*Annual percentage change, annual average
Note. The assessment in the Monetary Policy Report in October 2016 is shown in brackets.
Sources: Statistics Sweden and the Riksbank
Sources: Statistics Sweden and the Riksbank
| 2016 Q3 | 2016 Q4 | 2017 Q4 | 2018 Q4 | 2019 Q4 | |
|---|---|---|---|---|---|
| Repo rate | -0.50 | -0.50 (-0.50) | -0.56 (-0.56) | -0.15 (-0.15) | 0.36 (0.36) |
*Per cent, quarterly averages
Note. The assessment in the Monetary Policy Report in October 2016 is shown in brackets.
Source: The Riksbank
Deputy Governors Martin Flodén, Henry Ohlsson and Cecilia Skingsley entered reservations against the decision to extend the purchases of government bonds by SEK 30 billion. Mr Flodén advocated that the purchases should be extended by SEK 15 billion and only cover real government bonds. Mr Ohlsson and Ms Skingsley considered that the purchases should not be extended as monetary policy does not need to be made more expansionary in the current economic situation.
The decision on the repo rate will apply with effect from 28 December. The minutes from the Executive Board's monetary policy discussion will be published on 12 January. Further information on the Riksbank's purchases of government bonds and reinvestments can be found in an 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."
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