Sveriges Riksbank, which has maintained its ultra-low rate since February 2016, took the first tentative step toward normalizing its monetary policy in December last year by halting net new bond purchases while it continues to reinvest redemptions and coupon payments "until further notice."
But the Riksbank underscored that its monetary policy "still needs to be expansionary" in order to keep economic activity strong, curb any sharp rises in the exchange rate of the krona and thus keep inflation on target.
"According to the Riksbank's forecast, the appropriate time is approaching to slowly begin to raising the repo rate," the central bank said. "But it is important not to raise the rate too early."
The forecast for the repo rate was unchanged from December, with a small rate increase seen in the second half of this year that pushes up the 2018 average rate to minus 0.4 percent from minus 0.50 percent in 2017 and 2016.
By the first quarter of 2019 the repo rate is seen rising to minus 0.15 percent on average, implying a 35 basis point rate hike, and then hitting a positive 0.36 percent by the first quarter of 2020 and 0.88 percent by the first quarter of 2021.
While Sweden's economy has been strengthening in recent quarters, inflation has dropped in recent months after hitting the 2.0 percent target and wages have risen slower than the Riksbank had expected.
"This indicates that inflationary pressures are lower than was previously forecast," the central bank said.
For this year headline inflation - which fell to 1.7 percent in December 2017 - is seen averaging 1.7 percent, down from the previous forecast of 2.0 percent, and 1.8 percent in 2017.
Core inflation, which eased to 1.9 percent in December from 2.0 percent in November, is seen averaging 1.8 percent this year, below the 2.0 percent previously forecast.
For 2019 core inflation is seen averaging 1.9 percent, down from 2.0 percent previously forecast, and then hitting 2.0 percent in 2020, as earlier expected. Headline inflation is seen rising to 2.6 percent in 2019 and then 3.1 percent in 2020.
"It has taken a long time to bring inflation and inflation expectations back to 2 per cent, and the uncertainty surrounding the development of inflation means that monetary policy needs to proceed cautiously," the Riksbank said, adding that it remains ready to ease policy if conditions change.
Sweden's economy grew by an annual rate of 2.9 percent in the third quarter of 2017, up from 2.7 percent in the second quarter, and growth is seen averaging an unchanged 2.5 percent in 2017.
For 2018 growth is averaging 2.8 percent, slightly down from a previous 2.9 percent forecast, and then slowing to 1.8 percent in 2019 before bouncing back to 2.1 percent in 2010.
After rising from mid-December to end-January, the krona has depreciated this month and fell further in the wake of the Riskbank's policy statement.
The krona was trading at 9.95 to the euro today, down 1.2 percent since the start of this year and down 3.7 percent since early 2017.
Sveriges Riksbank issued the following statement:
"Good economic prospects but somewhat lower inflation in the coming year
Global economic activity is strengthening further and since December market participants have been expecting slightly less expansionary monetary policy abroad. Recent falls on equity markets do not change the picture of a good economic outlook.
In Sweden, growth is high, the labour market is strong and inflation is close to the target of 2 per cent. The strong economic activity has contributed to service prices increasing faster. But in recent months the rate of increase has declined. In addition, wages have increased at a slower pace than expected. This indicates that inflationary pressures are lower than was previously forecast. The inflation forecast has therefore been revised down slightly, primarily for 2018. From 2019 onwards, inflation is expected to be close to 2 per cent.
Inflation close to target with an expansionary monetary policy
For inflation to remain close to target going forward, it is important that economic activity continues to be strong and has an impact on price development, and that the Swedish krona does not strengthen too quickly. Monetary policy therefore still needs to be expansionary.
In light of this, the Executive Board has decided to hold the repo rate unchanged at −0.50 per cent. The forecast for the repo rate is unchanged since December and indicates that slow increases are set to be initiated during the second half of this year. The Riksbank's net purchases of government bonds amount to just over SEK 310 billion, expressed as a nominal amount. Until further notice, redemptions and coupon payments will be reinvested in the bond portfolio.
Monetary policy needs to proceed cautiously
According to the Riksbank's forecast, the appropriate time is approaching to slowly begin raising the repo rate. But it is important not to raise the rate too early. Economic activity is strong and inflation has been close to 2 per cent for some time, but the lower inflationary pressures create uncertainty over how inflation will develop going forward. It is also important that the krona does not appreciate too quickly. It has taken a long time to bring inflation and inflation expectations back to 2 per cent, and the uncertainty surrounding the development of inflation means that monetary policy needs to proceed cautiously. If conditions were to change, the Executive Board is, as before, prepared to implement further monetary policy easing.
Important with measures to reduce the risks linked to household indebtedness
Monetary policy safeguards the inflation target's role as nominal anchor for price and wage formation and thereby contributes to the positive development of the economy. But the low interest rates at the same time contribute to increasing the risks linked to high and rising household indebtedness. To achieve long-term sustainable development in the Swedish economy, the risks linked to the high household indebtedness need to be managed via measures within housing policy, taxation policy and, where necessary, macroprudential policy.
| 2016 | 2017 | 2018 | 2019 | 2020 | |||
|---|---|---|---|---|---|---|---|
| CPI | 1.0 | 1.8 (1.8) | 1.7 (2.0) | 2.6 (2.8) | 3.1 (3.1) | ||
| CPIF | 1.4 | 2.0 (2.0) | 1.8 (2.0) | 1.9 (2.0) | 2.0 (2.0) | ||
| GDP | 3.2 | 2.5 (2.5) | 2.8 (2.9) | 1.8 (1.7) | 2.1 (2.1) | ||
| Unemployment, 15-74 years, per cent | 6.9 | 6.7 (6.7) | 6.4 (6.5) | 6.4 (6.5) | 6.5 (6.5) | ||
| Repo rate, per cent | -0.5 | -0.5 (-0.5) | -0.4 (-0.4) | 0.0 (0.0) | 0.6 (0.6) |
*Annual percentage change, annual average
Note. The assessment in the December 2017 Monetary Policy Report is shown in brackets.
Sources: Statistics Sweden and the Riksbank
| 2017 Q4 | 2018 Q1 | 2018 Q2 | 2019 Q1 | 2020 Q1 | 2021 Q1 | |||
|---|---|---|---|---|---|---|---|---|
| Repo rate | -0.50 | -0.50 (-0.50) | -0.50 (-0.50) | -0.15 (-0.15) | 0.36 (0.36) | 0.88 |
* Per cent, quarterly means
Note. The assessment in the December 2017 Monetary Policy Report is shown in brackets.
Source: The Riksbank
Source: The Riksbank
Deputy Governor Henry Ohlsson entered a reservation against the decision to maintain the repo rate at its current level and against the repo-rate path in the Monetary Policy Report. He advocated raising the repo rate to −0.25 per cent with reference to the strong economic growth in Sweden and abroad.
Stefan Ingves will not participate in tomorrow's press conference on the monetary policy decision due to influenza. He did, however, participate in today's monetary policy meeting and decision by telephone.
Kerstin af Jochnick also participated in the meeting and decision by telephone for the same reason.
The decision from the monetary policy meeting will be published on 14 February at 09:30. As previously announced, a press conference on the monetary policy decision will be held at 11:00 on the same day. Deputy Governor Per Jansson and Jesper Hansson, Head of the Monetary Policy Department, will participate in the press conference.
The decision on the repo rate will apply from 21 February 2018. The minutes from the Executive Board's monetary policy meeting will be published on 23 February. A press conference with Deputy Governor Per Jansson and Jesper Hansson, Head of the Monetary Policy Department, will be held today at 11 a.m. in the Riksbank. Press cards must be shown. The press conference will be webcast live at www.riksbank.se."
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