Sweden cuts rates deeper into negative territory, steps up currency war
Stockholm
SWEDEN's central bank cut its main interest rate deeper into negative territory on Thursday and said it was ready to do more to revive inflation, fuelling a currency war even as its economy booms and concerns over a housing bubble grow.
As policymakers battle to weaken their currencies against global rivals, the Riksbank chopped its repo rate to -0.50 per cent from -0.35 per cent, adding fuel to a borrowing boom that helped push house prices up 12 per cent over the last year. It also said that it was looking at other ways to ease policy - including currency intervention.
But many analysts say that with the economy growing robustly and fears of a credit bubble rising, the Riksbank is running out of ammunition to push up inflation. It may not be able to compete with possible further easing by the European Central Bank in March, they add. "The Riksbank is caught in a currency war," said ING economist Rob Carnell, who believed trying to manage currencies was wrong, ineffective and short-sighted. "It is like trying to control the weather," he said.
The Swedish crown weakened sharply after the slightly bigger than expected rate cut to 9.52 versus the euro by 1319 GMT after peaking at 9.62, its weakest level in six months.
With financial markets in turmoil and the spectre of deflation spreading around the world, central banks from Europe to Canada and Australia have been preparing the ground for more monetary easing. Japan's central bank adopted negative rates in January.
"We have overall very expansive monetary policy globally," governor Stefan Ingves told reporters. "In such a world we cannot isolate ourselves from what is happening around us."
The risk, both for the Riksbank and others, is that policy easing in too many places will cancel itself out and force national banks into a vicious circle of competitive currency devaluation. Failure to respond would mean a risk the crown would strengthen and make it harder to hit the 2 per cent inflation target.
In a sign that a strong debate is emerging within the bank, two of the six board members voted against a cut. However, the majority of the board is worried that an uptick in inflation has stalled while risks in the global economy are growing.
China's growth is slowing, oil is hovering around US$30 a barrel and stock markets have slumped. Japan has adopted negative rates. German industrial output plunged and exports dropped in December, pointing to a weak end to 2015 for the European Union. Even the United States seemed to be losing steam at the end of last year.
A threatened global slowdown will make it even harder for the Riksbank to push up prices, which have undershot the central bank's 2 per cent target for more than five years, despite record low interest rates and a massive bond-buying programme.
Easier monetary policy risks stoking borrowing demand and a red-hot housing market which threatens to trip up the economy. REUTERS
