Sweden lowers benchmark rate for first time in two years

Riksbank announces a drop of 25 percentage points to the repo rate; first time the rate has been reduced since 2009
Stefan Ingves

The Riksbank on Tuesday announced a 25 basis point drop in the benchmark interest rate in Sweden.

At a meeting with analysts soon after making the announcement, governor Stefan Ingves said the Swedish economy was slowing down, and this had led to the decision to lower the rate.

Ingves also commented on the low inflationary pressures in Sweden and said that, combined, these factors had not only meant a lower rate was appropriate, but also a lower repo-rate path. That is, repo rate "hikes" have now been "pushed into the future", Ingves said. The central bank said the repo rate was expected to remain low next year, but no further guidance was given as to when a rise could eventually happen.

The statement from the central bank was clear in placing some of the blame for this shift on the deteriorating economic outlook "abroad".

"There is still considerable uncertainty regarding the public finance problems in, above all, the eurozone, and several euro countries are expected to implement more stringent fiscal tightening than was previously assumed," said the statement. "Growth in the eurozone is therefore expected to be low in the period ahead."

During his remarks, Ingves displayed a chart titled "Clear fall-off in Swedish export orders", leaving those gathered in no doubt over the impact the European crisis was having on the market.

Deputy governors Karolina Ekholm and Lars Svensson both expressed reservations about the decision. They preferred instead a deeper cut to the repo rate, to bring it down to 1.5%. "They also preferred a lower repo-rate path that stays at 1.25% from the second quarter of 2012 through the third quarter of 2013, and then rises to just below 3% by the end of the forecast period," said the central bank.

The pair justified their dissention by saying they thought the forecasts of foreign policy rates and Swedish resource use were both too high.

The minutes of the executive board's monetary policy discussion will be published on January 3, 2012. The decision on the repo rate will apply with effect from December 21.

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