Sveriges Riksbank, which has maintained its ultra-low rate since February 2016, also expressed concern that the exchange rate of the krona - which has weakened in the past year and will thus help boost inflation - is expected to strengthen, saying "an excessively rapid appreciation of the krona would make it more difficult to stabilise inflation."
As most other countries, the krona has weakened against the U.S. dollar since late January, and also against the euro, boosting import prices and thus inflation.
In response to the Riksbank's decision, the krona rose 1.7 percent against the euro to 10.31 but is still down 4.7 percent this year. Against the U.S. dollar, the krona rose 1.9 percent but is still down almost 7 percent since the start of this year.
The Riksbank is clearly worried a rise in the krona would defeat years of work to boost inflation and the board extended its mandate that allows it to intervene rapidly in the currency market.
"The risks of excessively low inflation merit particular attention, as at the prevailing interest rate levels, excessively low inflation is more difficult to manage than excessively high inflation," the Riksbank said, adding it is "prepared to adjust monetary policy" if inflation conditions were to change.
Underscoring the Riksbank's tightening bias, Deputy Governor Martin Floden jointed Deputy Governor Henry Ohlsson in wanting to raise rates faster than the official rate path, which sees the repo rate rising to minus 0.43 percent by the fourth quarter, then reaching a positive 0.01 percent by the third quarter of 2019 and 0.57 percent by the third quarter of 2020.
Floden wanted the repo rate to be raised by 25 basis points in September or October. Ohlsson, who has called for an immediate rate hike since February, also voted to raise the rate now.
Sweden's economy remains strong and inflation is close to the Riksbank's 2.0 percent target but inflation pressures are moderate and economic activity has to remain strong to keep up inflation.
Headline inflation rose to 1.9 percent in May from 1.7 percent in April and the Riksbank raised its forecast for inflation to average 2.0 percent this year, up from April's forecast of 1.8 percent. For 2019 the Riksbank now sees inflation averaging 2.7 percent, up from 2.6 percent.
Underlying inflation this year and in 2019 is seen averaging 2.1 percent, up from the earlier forecast of 1.9 percent.
The Swedish economy, which grew 2.3 percent last year, is seen growing another 2.5 percent this year, slightly down from its April forecast of 2.6 percent, and then 1.9 percent next year, down from 2.0 percent previously forecast.
In the first quarter of this year, Sweden's Gross Domestic Product grew by an annual 3.3 percent, up from 2.9 percent in the previous quarter.
In its previous policy decision from April, the Rikbank's board pushed back its forecast for a rate hike towards the end of this year from an earlier estimate of during the second half of 2018.
Sveriges Riksbank issued the following statement:
"Economic activity is strong and inflation is close to the target of 2 per cent. As earlier, however, inflationary pressures are moderate. Monetary policy needs to continue to be expansionary for inflation to remain close to target. The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent. The forecast for the repo rate is also unchanged and indicates as before that slow repo rate rises will be initiated towards the end of the year.
International economic activity is strengthening but uncertainty has increased
Economic developments abroad remain favourable. However, uncertainty over future developments has risen as a result of factors such as increased trade restrictions and economic policy developments in Italy. Inflation abroad is moderate but will rise this year due to higher oil prices. Normalisation of monetary policy abroad is taking place slowly.
Economic developments abroad remain favourable. However, uncertainty over future developments has risen as a result of factors such as increased trade restrictions and economic policy developments in Italy. Inflation abroad is moderate but will rise this year due to higher oil prices. Normalisation of monetary policy abroad is taking place slowly.
Strong Swedish economic activity, moderate inflationary pressures
In Sweden, economic activity is high, the labour market strong and inflation on target. As in other countries, higher energy prices have contributed to rising inflation. The krona exchange rate has developed more weakly than expected and together with more rapid energy price increases, this will contribute to higher inflation in the year ahead compared with in the previous assessment. In the longer term, however, the forecast for CPIF inflation is unchanged.
Measures of underlying inflation, which provide an indication of where inflation is heading, still suggest that inflationary pressures are moderate. For inflation to remain close to 2 per cent in the period ahead, it is important that economic activity continues to be strong and has an impact on price increases. The exchange rate is expected to strengthen gradually in the coming years but there is uncertainty surrounding the forecast. It is important that the krona exchange rate develops in a manner compatible with inflation remaining close to target.
In Sweden, economic activity is high, the labour market strong and inflation on target. As in other countries, higher energy prices have contributed to rising inflation. The krona exchange rate has developed more weakly than expected and together with more rapid energy price increases, this will contribute to higher inflation in the year ahead compared with in the previous assessment. In the longer term, however, the forecast for CPIF inflation is unchanged.
Measures of underlying inflation, which provide an indication of where inflation is heading, still suggest that inflationary pressures are moderate. For inflation to remain close to 2 per cent in the period ahead, it is important that economic activity continues to be strong and has an impact on price increases. The exchange rate is expected to strengthen gradually in the coming years but there is uncertainty surrounding the forecast. It is important that the krona exchange rate develops in a manner compatible with inflation remaining close to target.
Expansionary monetary policy for continued on-target inflation going forward
Overall, the Executive Board deems it appropriate to keep monetary policy unchanged. The Executive Board has therefore decided to leave the repo rate at −0.50 per cent. The forecast for the repo rate is also unchanged and indicates as before that slow repo rate rises will be initiated towards the end of the year. The Riksbank's holdings of government bonds amount to about SEK 330 billion, expressed as a nominal amount. Until further notice, redemptions and coupon payments will be reinvested in the bond portfolio.
If the conditions for the development of inflation were to change, the Executive Board is prepared to adjust monetary policy. The risks of excessively low inflation merit particular attention, as at the prevailing interest rate levels, excessively low inflation is more difficult to manage than excessively high inflation.
The Executive Board has also decided to extend the mandate that facilitates rapid intervention on the foreign exchange market. The krona has weakened in the past year. But in the years ahead, it is expected to strengthen and the exchange rate remains a source of uncertainty as regards the development of inflation. An excessively rapid appreciation of the krona would make it more difficult to stabilise inflation.
Overall, the Executive Board deems it appropriate to keep monetary policy unchanged. The Executive Board has therefore decided to leave the repo rate at −0.50 per cent. The forecast for the repo rate is also unchanged and indicates as before that slow repo rate rises will be initiated towards the end of the year. The Riksbank's holdings of government bonds amount to about SEK 330 billion, expressed as a nominal amount. Until further notice, redemptions and coupon payments will be reinvested in the bond portfolio.
If the conditions for the development of inflation were to change, the Executive Board is prepared to adjust monetary policy. The risks of excessively low inflation merit particular attention, as at the prevailing interest rate levels, excessively low inflation is more difficult to manage than excessively high inflation.
The Executive Board has also decided to extend the mandate that facilitates rapid intervention on the foreign exchange market. The krona has weakened in the past year. But in the years ahead, it is expected to strengthen and the exchange rate remains a source of uncertainty as regards the development of inflation. An excessively rapid appreciation of the krona would make it more difficult to stabilise inflation.
Important to have measures to reduce the risks associated with household indebtedness
The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. Achieving long-term sustainable development in the Swedish economy therefore requires measures within housing policy, taxation policy and, where necessary, macroprudential policy.
Forecast for Swedish inflation, GDP, unemployment and the repo rate *
2017 2018 2019 2020 CPI 1.8 2.0 (1.8) 2.7 (2.6) 2.9 (2.9) CPIF 2.0 2.1 (1.9) 2.1 (1.9) 1.9 (2.0) GDP 2.3 2.5 (2.6) 1.9 (2.0) 2.1 (2.1) Unemployment, per cent 6.7 6.2 (6.3) 6.3 (6.4) 6.4 (6.4) Repo rate, per cent -0.5 -0.5 (-0.5) -0.1 (-0.1) 0.5 (0.5)
*Annual percentage change, annual average
Note. The assessment in the April 2018 Monetary Policy Report is shown in brackets.
Sources: Statistics Sweden and the Riksbank
Forecast for the repo rate*
2018 Q2 2018 Q3 2018 Q4 2019 Q3 2020 Q3 2021 Q3 Repo rate -0.50 -0.50 (-0.50) -0.43 (-0.43) 0.01 (0.01) 0.57 (0.57) 1.15
* Per cent, quarterly mean values
Note. The assessment in the April 2018 Monetary Policy Report is shown in brackets.
Source: Sveriges Riksbank
Deputy Governor Martin Flodén entered a reservation against the repo rate path in the Monetary Policy Report. He advocated a repo rate path that indicated an initial increase of the repo rate by 0.25 percentage points in September or October this year but that coincided with the report's repo rate path as from the third quarter of 2019.
Deputy Governor Henry Ohlsson entered a reservation against the decision to main-tain 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.
Deputy Governors Martin Flodén and Henry Ohlsson entered reservations against the decision to extend the mandate for foreign exchange interventions. Mr Flodén cited the same reasons as he did regarding previous decisions on the mandate. Mr Ohlsson considered that in a situation with inflation and inflation expectations close to the target level, potential interventions on the foreign exchange market can be managed without a special mandate.
The decision on the repo rate will apply from 4 July 2018. The minutes from the Executive Board's monetary policy meeting will be published on 12 July. 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 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 broadcast live on www.riksbank.se."
The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. Achieving long-term sustainable development in the Swedish economy therefore requires measures within housing policy, taxation policy and, where necessary, macroprudential policy.
| 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|
| CPI | 1.8 | 2.0 (1.8) | 2.7 (2.6) | 2.9 (2.9) |
| CPIF | 2.0 | 2.1 (1.9) | 2.1 (1.9) | 1.9 (2.0) |
| GDP | 2.3 | 2.5 (2.6) | 1.9 (2.0) | 2.1 (2.1) |
| Unemployment, per cent | 6.7 | 6.2 (6.3) | 6.3 (6.4) | 6.4 (6.4) |
| Repo rate, per cent | -0.5 | -0.5 (-0.5) | -0.1 (-0.1) | 0.5 (0.5) |
*Annual percentage change, annual average
Note. The assessment in the April 2018 Monetary Policy Report is shown in brackets.
Sources: Statistics Sweden and the Riksbank
| 2018 Q2 | 2018 Q3 | 2018 Q4 | 2019 Q3 | 2020 Q3 | 2021 Q3 | |
|---|---|---|---|---|---|---|
| Repo rate | -0.50 | -0.50 (-0.50) | -0.43 (-0.43) | 0.01 (0.01) | 0.57 (0.57) | 1.15 |
* Per cent, quarterly mean values
Note. The assessment in the April 2018 Monetary Policy Report is shown in brackets.
Source: Sveriges Riksbank
Source: Sveriges Riksbank
Deputy Governor Martin Flodén entered a reservation against the repo rate path in the Monetary Policy Report. He advocated a repo rate path that indicated an initial increase of the repo rate by 0.25 percentage points in September or October this year but that coincided with the report's repo rate path as from the third quarter of 2019.
Deputy Governor Henry Ohlsson entered a reservation against the decision to main-tain 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.
Deputy Governors Martin Flodén and Henry Ohlsson entered reservations against the decision to extend the mandate for foreign exchange interventions. Mr Flodén cited the same reasons as he did regarding previous decisions on the mandate. Mr Ohlsson considered that in a situation with inflation and inflation expectations close to the target level, potential interventions on the foreign exchange market can be managed without a special mandate.
The decision on the repo rate will apply from 4 July 2018. The minutes from the Executive Board's monetary policy meeting will be published on 12 July. 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 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 broadcast live on www.riksbank.se."
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