Riksbank purchases government bonds for a further SEK 40-50 billion, lowers the repo-rate path significantly and holds the repo rate at −0.25 per cent
Date
29/04/2015
The expansionary monetary policy is having a positive impact on the Swedish economy and inflation has begun to rise. To ensure this development continues, the Executive Board of the Riksbank has decided to purchases government bonds for a further SEK 40-50 billion. In addition, the repo-rate path has been lowered significantly compared with the decision in February. The repo rate has been left unchanged at −0.25 per cent but may be cut further. Slow increases in the repo rate are not expected to begin until the second half of 2016. These measures and the readiness to do more underline that the Riksbank is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation.
Economic activity strengthening
Economic activity abroad continues to slowly improve. Although the development of economic activity abroad continues to be uncertain, the recovery in the euro area appears to be on firmer ground. GDP growth in Sweden is good and the labour market is continuing to improve.
Inflation is rising from low levels
Inflation has begun to rise, although from low levels. This is partly due to the weakening of the krona over the last 12 months, which has led to higher import and goods prices. However prices for services, which are not affected as much by the exchange rate, are also increasing more rapidly than last year. At the same time, inflation expectations have increased somewhat. As economic activity improves, it will become easier for companies to raise their prices. But it is uncertain how quickly this will happen, particularly given the fact that inflation has been lower than expected on several occasions. Weaker international economic activity or a rapid appreciation of the krona could also lead to inflation not rising fast enough.
Further measures to ensure that inflation continues to rise
To support the positive development and ensure that inflation rises sufficiently quickly, the Executive Board of the Riksbank has decided to extend the purchases of nominal government bonds by a further SEK 40-50 billion. The purchases will be made during the period from May to the end of September and will comprise maturities of up to 25 years. The purchases decided on by the Riksbank to date thus comprise SEK 80-90 billion. At the same time, the repo-rate path has been lowered significantly compared with the decision in February. Slow increases in the repo rate from −0.25 per cent are not expected to begin until the second half of 2016. The repo-rate path also reflects the fact that it is possible to cut the repo rate further.
Readiness to do more
Monetary policy reflects the fact that the Riksbank's tolerance for low inflation is very limited. The Riksbank is still highly prepared to make monetary policy even more expansionary if necessary, even between the ordinary monetary policy meetings. The purchases of government bonds can be extended. Moreover, the repo rate can be cut further and future increases can be implemented more slowly. The Riksbank is also 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.
Financial risks must be managed
Monetary policy now needs to be highly expansionary to push up inflation and reduce the risks associated with a situation in which inflation is too low. At the same time, however, the low interest rates contribute to the trends of rising house prices and increasing indebtedness in the Swedish household sector continuing. It is therefore important that the government and other authorities implement measures that reduce the risks relating to household indebtedness. Rapid price increases for high-risk financial assets also entail risks that require increased vigilance in the period ahead.
Forecasts for Swedish inflation, GDP, unemployment and the repo rate*
2014 2015 2016 2017
CPI
-0.2
0.3 (0.1)
2.1 (1.9)
2.7 (3.3)
CPIF
0.5
1.1 (0.9)
2.3 (2.0)
2.2 (2.2)
GDP
2.1 (1.8)
3.2 (2.7)
3.4 (3.3)
2.7 (2.2)
Unemployment,ages 15-74, per cent
7.9
7.6 (7.6)
7.2 (7.1)
6.9 (6.7)
Repo rate, per cent
0.5
-0.2 (-0.1)
-0.2 (0.0)
0.3 (0.9)
*Annual percentage change, annual average
Note. The assessment in the February 2015 Monetary Policy Report is shown in brackets.
Forecast for the repo rate*
2014 Q4 2015 Q1 2015 Q2 2016 Q2 2017 Q2 2018 Q2
Repo rate
0.08
-0.06 (-0.05)
-0.26 (-0.11)
-0.29 (-0.12)
0.24 (0.83)
0.78
*Annual percentage change, annual average
Note. The assessment in the February 2015 Monetary Policy Report is shown in brackets.
The decision on the repo rate will apply with effect from 6 May. The minutes from the Executive Board's monetary policy discussion will be published on 12 May. Further information on the Riksbank's purchases of government bonds can be found in a separate basis for the decision on the Riksbank's website, www.riksbank.se.
