(Bloomberg) — The Riksbank just became the latest central bank to backtrack on plans to tighten monetary policy, as a less certain economic outlook means negative Swedish rates may persist into next year.
Policy makers in Stockholm agreed to keep the at minus 0.25 percent, as expected. But they also said rates will stay where they are for longer than previously signaled amid signs of disinflation. The krona sank about 1.2 percent against the euro after the statement was released, prompting one analyst to quip that the Riksbank had activated its “krona-killing machine.”
The Riksbank said that its main interest rate “will remain at this level for a somewhat longer period of time than was forecast in February, when it signaled it may raise rates in during the second half of 2019. It expects to hike either “towards the end of the year or at the beginning of next year” adding that “rate rises thereafter are expected to occur at a somewhat slower pace.”
The bank also announced it will purchase government bonds for a nominal value of 45 billion kronor ($4.7 billion) from July this year through to December 2020.
Relying on exports for about half its economic output, Sweden has started to feel some of the weakness that’s gripped the euro zone. And with the European Central Bank forced into a more dovish position, policy makers in Stockholm have had little choice but to follow its retreat. The ECB expects its key rate to be unchanged at least through 2019. In the U.S., the Federal Reserve has halted its hiking cycle.
Robert Bergqvist, chief economist at SEB in Stockholm, characterized the overall message as very dovish.
In its statement on Thursday, the Riksbank said that “the good global economic activity is continuing and as expected has entered a phase with lower growth rates. However, inflation abroad has been unexpectedly weak, especially in the euro area.” Policy makers in Sweden also noted that “several central banks have communicated a more expansionary monetary policy. There is still considerable uncertainty over international developments.”
Bergqvist said the Riksbank’s comments signal that it’s “worried” and taking a “clear step in a softer direction” as a result.
“We still believe that the next hike will be in April next year,” he said. “ Given what they are signaling they will probably wait for more data before acting.” Overall, the signal is “very much more dovish than the market and we expected. ”
Not that long ago, the picture was rather different. In December, Governor Stefan Ingves raised Swedish rates for the first time in seven years as the Riksbank tried to start moving away from extreme monetary stimulus and all the potential imbalances it brings. But Ingves and his board were forced to reassess theiroptions at the beginning of this year, after inflation once again started to trail the Riksbank’s estimates.
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