Sweden cuts key interest rate to record low -0.35%

[STOCKHOLM] Sweden's central bank on Thursday cut its repo rate by 10 basis points to a record low -0.35 per cent, to avoid a strengthening of the krona amid the Greek crisis.

"Inflation is rising and economic activity in Sweden is continuing to strengthen. But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece," the bank said in a statement.

"In this uncertain environment, monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2.0 per cent," it said.

The Riksbank has been trying to lift inflation since it stalled at the end of 2012, and has kept the repo rate in negative territory, which is intended to encourage spending, since February.

Sweden, like the neighbouring eurozone, has been concerned about the threat of deflation. Long spells of falling prices can be extremely destructive for economies if consumers start to postpone purchases in hopes of better deals, as that can set off a spiral of job, wage and output cuts that further reduce prices.

"Since the repo rate decision in April, the krona has ... become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation," the bank said in explaining its decision.

The Riksbank said its expansionary policy was having the desired effect, with inflation, excluding mortgage rates, ticking in at 1.0 per cent in May and expected to be close to 2.0 per cent by the end of the year.

However, consumer prices were far from the 2.0 per cent target, inching up just 0.1 per cent in May.

"Prices of goods and food are increasing in line with historical averages, while the rate of price increase on services is rising from a low level," it said.

Thursday's rate cut surprised analysts, who had expected the rate to stay unchanged after the Swedish government's assessment on Monday that the Greek crisis posed little threat to the Scandinavian economy.

"Unsurprisingly, yet another surprise," commented Nordea bank's Mikael Sarwe.

The bank also announced an extension of its bond purchasing programme, buying a further 45 billion kronor from September until the end of the year.

But Jessica Hind of Capital Economics in London said it was uncertain whether this would be enough to prevent a strengthening of the krona.

"The Riksbank's QE (quantitative easing) programme is still set to be less aggressive than that of the ECB, keeping the upward pressure on the krona," she said.

Sweden's economy is in overall good health compared to many of its European neighbours.

The Riksbank on Thursday forecasted growth of 2.9 per cent in 2015, anticipating wage increases of 2.6 per cent and unemployment dropping 0.2 points to 7.7 per cent.

The bank has also said it is prepared to cut the repo rate further if necessary, to around -0.4 per cent in the fourth quarter.

AFP