Riksbank Keeps Repo Rate on Hold, Hints at Longer Period of Loose Monetary Policy

As widely expected, the Swedish central bank, Riksbank, kept its repo rate on hold at -0.50 percent. However, the bank’s report contained certain surprises hinting at a loose monetary policy for an even longer period, noted Nordea Bank in a research report.

The central bank gave out three surprises in its report today. Firstly, the Riksbank’s asset purchasing program was extended to cover the second half of 2017 with purchases for SEK 15 billion. Out of the SEK 15 billion, 7.5 billion will be spent to buy nominal government bonds and 7.5 billion will be spent on real government bonds. Earlier, it was decided that the central bank would exit the bond buying program at the end of the first half of this year. The central bank’s latest decision shows that it is ready to act especially in case of a sharp rise in krona.

Secondly, the expected timing of the first hike in repo rate is delayed to mid-2018 from the beginning of 2018. The end point for the repo rate stays the same at 0.49 percent; however, this level is not expected until the second quarter of 2020, stated Nordea Bank. And thirdly, the probability of a rate cut in the short term was lowered.

The initial two surprising messages from Riksbank appear to be more important, while the entire report is considered to be more dovish than expected, said Nordea Bank. The report shows the paradox of a solid economy on the one hand and modest cost pressures on the other in spite of a clear upward revision to the central bank’s projection of the Swedish economy. The central bank stated in its report that stabilizing inflation close to 2 percent needs continued strong economic activity.

The Swedish central bank cut its projection for wages. The lowered wage growth was the reason why the Riksbank also cut its long-term inflation forecast. However, it kept its short-term projection unchanged.

“We stick to our forecasts of a first rate hike in October 2018 and a repo rate of -0.25% at end-2018”, added Nordea Bank.

The material has been provided by InstaForex Company – www.instaforex.com

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