The European Central Bank’s reluctance to raise interest rates is putting pressure on Sweden’s central bank to keep its own stimulus measures in place, the Riksbank has acknowledged, making it harder for policymakers to respond to rapid growth in the local economy.
The Riksbank surprised markets at its most recent policy meeting last month by extending its bond-buying programme and pushing back its forecast for an interest rate rise.
The bank’s dovishness has been questioned in light of Sweden’s strong economic growth rate, with other regulators pushing the bank to take account of concerns of overheating in the housing and credit markets.
However, the Riksbank’s mandate is focused solely on inflation, which has remained relatively weak.
The Riksbank had already suggested that too fast an appreciation in the krona could threaten inflation through cheaper imports, and in the minutes of the latest meeting, released today, it said that would be likely to happen “if Swedish monetary policy were to deviate too much from policy abroad”. Riksbank governor Stefan Ingves said “it is uncertain how long it will take for the ECB to start to normalise its monetary policy and at which rate this will take place”.
Sweden’s record-low interest rates caused the krona to fall to 6-year lows last autumn, as traders took advantage of the low rates and sold krona to fund investments in higher-yielding currencies. The Riksbank’s fear is that raising rates faster than the ECB could cause the reverse to happen, with relatively higher rates attracting investors to krona-denominated assets, which will drive up the value of the currency and make imports cheaper, pushing down inflation.
The minutes also revealed the extent of disagreements within the bank’s executive board. Half of the board opposed the decision to extend bond purchases, with Mr Ingves forced to use his casting vote. However, deputy governor Henry Ohlsson – who has recently suggested the Riksbank should start planning for the end of its quantitative easing programme – also disagreed with the decision to push the forecast for a first rate rise to mid-2018, though he did not enter a formal reservation.
Deputy governor Per Jansson, in contrast, discussed whether the bank should cut the repo rate even further into negative territory, though he noted that “the remaining scope for cutting the repo rate is not endless”.