Repo rate cut to 3.75 per cent
Date
23/10/2008
The Executive Board of the Riksbank has decided to cut the repo rate by 0.5 percentage points to 3.75 per cent. It is assessed that over the coming six months the repo rate will need to be cut by a further 0.5 percentage points. The interest rate cuts are aimed at alleviating the effects of the financial crisis on the real economy and at the same time attaining the inflation target of 2 per cent.
Financial crisis aggravates economic slowdown
Since mid-September the global financial crisis has worsened and it is now clearly affecting developments in Sweden. The crisis in the financial markets has led to higher loan costs for companies and households, lower capital wealth and increased uncertainty in general. Access to credit has declined. The assessment is that the financial crisis aggravates the ongoing economic downturn resulting in a weaker labour market and lower inflation.
Large interest rate cut and lower interest rate path
To alleviate the effects of the financial crisis in the Swedish economy, the repo rate needs to be cut relatively substantially over a comparatively short period. The repo rate has been cut by one percentage point in the past fortnight and the assessment is that it needs to be cut further by 0.5 percentage points to 3.25 per cent during the coming six months. However, the effects of the lower repo rate will probably be less than usual. The reason is that the confidence crisis in the financial system has led to high risk premiums so that the normal link between short market rates and the repo rate has been broken. The Riksbank is regularly taking other measures to improve the functioning of the financial markets.
Inflation falling rapidly towards the target
Resource utilisation is still slightly higher than normal, but will fall rapidly next year and then be slightly lower than normal. Inflation is high at present but expected to drop back quickly over the coming year. It will then rise slightly and be at the target level of 2 per cent in 2011.
Great uncertainty
The uncertainty in the assessments is unusually great this time. If the financial crisis intensifies, or if the effects on the real economy are more extensive, it may be necessary to cut the repo rate more than is assumed in the current assessment. However, if the exchange rate remains weak or if inflation remains high, a higher repo rate may be justified. The future direction for monetary policy will depend on how new information on economic developments abroad and in Sweden will affect the prospects for inflation and economic activity in Sweden.
Forecast for inflation and GDP
Annual percentage change
3.7 (3.9)
2.1 (3.2)
1.6 (2.0)
2.0
1.2 (1.4)
0.1 (0.8)
2.5 (2.6)
2.8
Note. The assessment in the September Monetary Policy Update is shown in brackets.
Inflation forecast, 12-month figures
Annual percentage change
3.0 (3.9)
1.6 (2.3)
1.8 (2.0)
2.1
Note. The assessment in the September Monetary Policy Update is shown in brackets.
Forecast for the repo rate
Per cent, quarterly average
4.25
4.54
3.9 (4.7)
3.2 (4.5)
3.4 (4.3)
3.76
Note. The assessment in the September Monetary Policy Update is shown in brackets.
The minutes from the Executive Board’s monetary policy discussion will be published on 5 November. The decision on the repo rate will apply from Wednesday, 29 October.www.riksbank.se/
