Riksbank Sticks With 0% Rate as Inflation Goal Won’t Be Hit for Years
(Bloomberg) -- Sweden’s central bank Governor Stefan Ingves made clear he’s more worried about withdrawing monetary support too soon rather than too late, given the severity of the current crisis.
Speaking to reporters on Wednesday, Ingves said he’s in “no hurry” to adjust the Riksbank’s guidance, which shows a key interest rate of zero into 2024, as inflation remains stubbornly below the 2% target for years to come.
“It would be more damaging for the Swedish economy to dismantle monetary policy in its present form too early, compared to keeping it intact for somewhat too long,” Ingves said.
The Riksbank governor reiterated he has no issue with inflation overshooting the target “for a period of time,” in comments that echo the stance of the U.S. Federal Reserve. Ingves acknowledged that the economic outlook for Sweden is brighter than initially feared, but warned that caution is needed because the pandemic still hasn’t “loosened its grip.”
Sweden’s economy emerged less battered than most from 2020, after it responded to the pandemic with limited restrictions and historic government support. Last year’s GDP contraction was just 2.8%, versus a decline of almost 7% in the euro zone. That performance, combined with recent positive data, has most economists betting the Riksbank won’t return to the negative rates it abandoned more than a year ago.
But with inflation remaining well below the central bank’s target (it was just 0.5% in December), policy makers have regularly reminded the market that rate cuts remain in the toolbox. That’s despite Ingves’s stated preference for bond purchases over any reduction in rates.
Robert Bergqvist, chief economist at SEB, said he discerned a “touch of hawkishness” in Wednesday’s statement. “It opens the door for a tapering of QE holdings,” he tweeted.
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“We expect policy makers to refrain from further stimulus while they weigh the prospects of a swift recovery in the second half of this year..”
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The krona was little changed against the euro by midday, and the yield on Sweden’s benchmark 10-year bond traded largely in line with the European market.
“The Executive Board’s current assessment is that the envelope for asset purchases will be fully utilised by the end of 2021 and that the size of the holdings will be maintained on this level at least during 2022,” the bank said.
Read: Sweden Riksbank GDP and Inflation Forecasts: (Table)
Meanwhile, changes in consumer spending patterns as a result of the pandemic have made inflation data less transparent, giving central bankers a bit more room to maneuver. And Sweden faces added confusion around labor-market data following changes in methodology.
SWEDEN REACT: Riksbank Airs Relief With Vaccinations Underway
Ultimately the economic recovery in Sweden, like elsewhere in Europe, hinges on its ability to immunize the population against Covid. Sweden’s vaccination program started in late December and, despite a rocky beginning in the European Union, the Nordic country expects its entire adult population to have been offered an inoculation shot by mid-2021.
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