Sweden’s central bank left its key interest rate unchanged and boosted the size of its asset purchases, citing the positive impact of its stimulus measures on the economy and rising inflation.
Defying economists’ expectations for a third consecutive reduction, the Executive Board of the Riksbank on Wednesday left the repo rate unchanged at -0.25 percent. The bank was widely expected to cut the rate to -0.35 percent.
The repo rate was previously slashed in March, by 15 basis points. The bank had taken the rate into negative zone with a ten basis points cut in February, when it launched its bond purchase programme.
On Wednesday, the Riksbank signaled further reduction in the repo rate. The bank also lowered its repo rate path significantly from February and, said any increase in the rate will be slow and is not likely happen until the second half of 2016.
The board also decided to purchase government bonds for a further SEK 40-50 billion and bonds with maturities of up to 25 years will be purchased during May to the end of September. The purchases decided on by the Riksbank to date thus comprise SEK 80-90 billion.
“Monetary policy reflects the fact that the Riksbank’s tolerance for low inflation is very limited,” the bank said.
“The Riksbank is still highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings.”
Headline inflation picked up slightly in March to 0.2 percent and core inflation held steady at 0.9 percent. Prices rose for a second straight month. Meanwhile, producer price inflation hit a seven-month high in March. The bank attributed the modest gains in inflation partly to the weaker krona.
The Riksbank raised the inflation forecast for this year to 0.3 percent from 0.1 percent seen in February. The projection for next year was lifted to 2.1 percent from 1.9 percent. However, the forecast for 2017 was cut to 2.7 percent from 3.3 percent.
The bank expects core inflation to reach 2 percent at the turn of the year 2015-2016 and hit 2.2 percent in 2017.
GDP growth in Sweden is good and the labor market is continuing to improve, the bank said.
Growth forecast for this year was sharply raised to 3.2 percent from 2.7 percent. The outlook for next year was boosted to 3.4 percent from 3.3 percent. The projection for 2017 was lifted to 2.7 percent from 2.2 percent.
The Riksbank also said that it was prepared to launch a programme for loans to companies via the banks and to intervene on the foreign exchange market “if the upturn in inflation is threatened as the result, for instance, of a very troublesome market development”. Purchases of other assets than government bonds are also a possibility, the bank added.
“Further easing measures (rate cuts, QE, loans to companies, FX interventions) cannot be ruled out and will be a direct function of SEK strength,” ING Bank forex strategist Petr Krpata said.
“We would expect the Riksbank to ease the policy further should SEK strengthen more rapidly.”
The material has been provided by InstaForex Company – www.instaforex.com