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Sweden’s central bank kept interest rates on hold but unexpectedly announced an extension of its quantitative easing programme after its April meeting, with the central bank’s executive board split over the decision in light of the economy’s recent strength.
The Riksbank acknowledged that “economic activity in Sweden is increasingly strong”, but said it now thinks it “will take longer before inflation stabilises around 2 per cent”.
The bank said it will extend its purchases of government bonds by a further SKr15bn (€1.56bn) during the second half of the year, and it shifted its forecast for an interest rate rise even further back, until mid-2018.
The Swedish krona dropped sharply after the announcement, and at publication time was 0.5 per cent weaker for the day against the euro, at SKr9.6006 per euro.
Analysts had widely expected the bank to make no changes to its position this month, as inflation looks to be on track to hit long-term targets and the government further upgraded its forecasts for economic growth last week.
Three members of the bank’s six-person executive board entered reservations against the decision to extend bond purchases, forcing governor Stefan Ingves to use his casting vote. Martin Flodén, Henry Ohlsson and Cecilia Skingsley argued that “monetary policy does not need to be made more expansionary in the current economic situation”.
Mr Ohlsson had recently hinted at the need to “ease up on the accelerator” at some point in the near future but, as analysts at SEB noted this morning, “the problem is that as soon as the Riksbank sends tightening signals, the krona will appreciate and make it more difficult to hike rates”.
The Riksbank has a long-term inflation target of 2 per cent, and Sweden’s reliance on foreign trade means the inflation rate is highly sensitive to changes in the value of the krona, which can drive down the costs of imports.
Andreas Wallström, chief analyst at Nordea Markets, said “this was a more dovish message than we, and the market, had expected”, but did not expect it to change course soon:
It would be premature to expect a hawkish turnaround in policy anytime soon. There’s yet no evidence of rising core inflation and the low wage agreements will hold back domestic inflation. Without a substantial pick-up in prices globally, inflation will therefore most likely continue to be a challenge for the Riksbank.
Governor Stefan Ingves (pictured) will hold a press conference at 10:00 UK time.