RTTN:Sweden Lowers Repo Rate First Time Since 2009 As Euro Crisis Dampens Growth
(RTTNews) - The Swedish central bank on Tuesday decided to cut its benchmark repo rate for the first time since July 2009. Additionally, the bank lowered the repo rate path as recent economic developments in the euro area dampened domestic economic activity.
The repo rate was lowered to 1.75 percent after keeping it unchanged at 2 percent during the previous two rate-setting sessions.
"The weak development of the economy in the euro area is having a dampening effect on the Swedish economy, which is now slowing down following strong development so far this year," the bank said. There has been a fall in orders to Swedish export companies and exports will be much weaker next year, it noted.
Lower domestic demand will affect the labor market and unemployment will increase somewhat in the year ahead, Riksbank observed.
The repo rate will now gradually be raised to 3.2 percent towards the end of 2014, compared to the previously predicted 3.5 percent. The revised repo-rate path will gradually stabilize inflation around 2 percent and bring resource utilization to normal levels, the bank said in a statement.
Also, in its Monetary Policy Update published today, the bank cut its 2012 growth outlook for the economy. Riksbank said it expects the Swedish economy to grow 1.3 percent in 2012, down from the 1.5 percent forecast in October.
However, gross domestic product is expected to rise 4.6 percent this year, faster than the bank's earlier prediction of 4.2 percent. The economy is expected to grow 2.3 percent in 2013 compared to the previously forecast 2.4 percent. In 2014, the GDP will rise 2.6 percent, faster than the 2.5 percent projected in October.
The decision to lower the repo rate was supported by low inflationary pressures prevailing in the economy. The bank expects weak domestic demand together with the poorer global economic outlook to keep inflationary pressures low in the period ahead.
The central bank also cut its inflation forecast for 2012 and 2013. The bank now expects inflation to ease to 1.5 percent next year, down from its October prediction of 1.9 percent. In 2013, inflation is likely to rise to 2 percent and then to 2.7 in 2014.
Additionally, Riksbank said it expects Sweden to post a budget surplus in 2011. General government net lending is likely to be positive this year and amount to 0.5 percent of GDP. Over the coming years, it will strengthen further, the central bank said.
The economy expanded 4.6 percent during the third quarter compared with the same quarter last year and grew 1.6 percent sequentially.
