Sweden cuts interest rate further below zero

STOCKHOLM • Sweden's central bank has lowered its key interest rate even further below zero and said it is prepared to use its full toolbox of measures as it battles to revive inflation and keep the krona from appreciating.

The repo rate was reduced to minus 0.5 per cent from minus 0.35 per cent, the bank said. A cut was predicted by 10 of the 18 analysts surveyed by Bloomberg, though only three anticipated this magnitude.

The bank said government bond purchases will continue as planned for the first six months of this year and that it "will reinvest maturities and coupons from the government bond portfolio until further notice".

"Uncertainty regarding global developments is still high, with low inflation and several central banks pursuing more expansionary monetary policy," the Riksbank said.

"Swedish monetary policy must relate to this. Otherwise the krona exchange rate is at risk of strengthening at a faster rate than in the forecast, which would make it harder to push up inflation and stabilise it around 2 per cent."

The krona slumped by as much as 1.6 per cent to 9.61 per euro, the lowest since August.

Swedish policymakers have unleashed unprecedented stimulus over the past year to save the economy from deflation and keep the krona from appreciating.

They were forced to respond as their colleagues at the European Central Bank are also going all out to revive price growth and sustain an expansion across Europe.

The Riksbank so far has been able to stabilise inflation expectations for the years ahead, while current consumer price growth remains far below the target.

Even though the economy expanded by an annual 3.9 per cent in the third quarter, underlying price gains slowed to 0.9 per cent in December. Inflation by that measure has trailed the central bank's target for five years.

Policymakers, led by Riksbank governor Stefan Ingves, are being criticised from all sides - first for not doing enough, and now for endangering financial stability.

Economists at some of Sweden's largest banks argue that global forces outside the Riksbank's control make it virtually impossible for the central bank to reach its inflation target any time soon.

Critics, among them former Bank of England governor Mervyn King, claim that more stimulus merely increases the risk that a housing market bubble may burst.

"It's a bit provocative that they are so clearly continuing this inflation hunt," said Nordea Bank economist Andreas Wallstroem.

"There are no signs whatsoever that they are becoming softer in that fight. A majority in the board still have their minds set on continuing."

Their efforts probably will not be enough, said Mr Wallstroem.

"The headwinds are so strong with low inflation pressure and low wage increases," he said. "The weaker krona will help inflation a bit but that's a temporary effect."

There is also growing disagreement within the board, with deputy governors Martin Floden and Henry Ohlsson advocating an unchanged rate.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on February 12, 2016, with the headline 'Sweden cuts interest rate further below zero'. Print Edition | Subscribe