Sweden's central bank makes unexpected rate cut

Greek uncertainty hits Sweden as Riksbank tightens measures by cutting its main interest rate while increasing its bond buying program

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

Sweden's central bank cut its benchmark interest rate to -0.35 percent in a surprise move on Thursday and expanded its asset purchase programme, battling the threat posed by a strengthening crown to consumer prices flirting with deflation.

The bank said uncertainty abroad had increased and it was difficult to assess the consequences of the situation in Greece.

The crown appreciated when the Riksbank unexpectedly left the repo rate unchanged in April. Since then it has strengthened in a trade weighted currency-index closely watched by the Riksbank, exceeding the central bank's forecasts.

"Inflation has been slightly lower, and the exchange rate has become a bit stronger than we previously thought, and, not least, the uncertainty in the world around us has increased," Riksbank Governor Stefan Ingves told a news conference following the decision.

"We thought it was appropriate to send a clear signal that we are prepared to do whatever it takes to bring inflation to 2 percent," he said.

The central bank also expanded its bond buying by 45 billion Swedish crowns ($5.3 billion) and said it was prepared to intervene in the foreign exchange market if the upturn in inflation was threatened.

Sweden is battling deflation just as it enjoys one of Europe's strongest growth rates, accompanied by concerns about a housing bubble and one of the region's highest household debt piles. This poses a dilemma for the central bank who has urged other regulators to tighten rules for banks and borrowers.

The Riksbank has cut rates repeatedly over the past year to boost inflation that is far below the bank's target, the previous easing coming in March as a strengthening of the crown risked breaking an upward trend in consumer prices.

However, the crown has been relatively stable against the euro and the situation in Greece has not yet prompted the same "safe haven" currency movements seen in 2011-2012 when investors fled the euro for the crown and other currencies seen as stable.

A large majority of analysts in a Reuters poll had forecast the Riksbank would keep its already ultra-loose policy unchanged after the latest inflation figures gave it some breathing room in its fight to fend off the threat of deflation.

But worries over the currency dominated.

"The crown has strengthen more than expected and the Riksbank's inflation forecasts has been higher than most others," said Claes Mahlen, an analyst at Handelsbanken.

"So, it is better to do 'too much' when you have the possibility to influence, especially before the upcoming wage negotiations."

It was the first Riksbank rate cut decision this year that was not unanimous, with Deputy Governor Henry Ohlsson entering a reservation over the move and calling for unchanged rates.

There are also worries that low inflation is playing into lower wage expectations ahead of huge wage round negotiations starting this year in the heavily unionised country.

Consumer prices rose 0.1 percent in May -- the third month in a row when headline prices increased on an annual basis and a better result than the Riksbank had expected. The economy grew at 2.5 percent in the first quarter.

The Swedish crown weakened against the euro after the decision and traded at 9.34 compared to 9.26 just before the announcement.