STOCKHOLM: The Swedish central bank, the Riksbank, cut its key interest rate to 0.75 percent yesterday as worrying deflationary signs lingered on the horizon for the Nordic region’s largest economy.
Sweden is a member of the European Union but not of the eurozone, so it manages its own monetary policy, and the latest decision comes against a background of unusually low inflation across most of Europe.
“Economic activity is developing largely as the Riksbank had forecast earlier. However, inflation has been unexpectedly low,” the bank said in a statement about its first rate cut, of 0.25 percentage point from 1.0 percent, since December 2012.
“Despite the recovery, inflationary pressures over the coming year are expected to be much lower than in the most recent forecast in October,” the bank said.
In November the European Central Bank (ECB) cut its key interest rates to new all-time lows in a largely unexpected move in the face of disinflationary pressures in the euro area.
Although Sweden is outside the euro, there have also been concerns over rapidly falling inflation in an economy dependent on trade with the euro area and affected by weak demand and a falling exchange rate.
Last month the Swedish central bank predicted an overall inflation rare of zero for 2013 which it revised yesterday to minus 0.1 percent.
In 2014 the bank expects inflation to move back into the positive to 0.6 percent while in October the forecast was for 1.2 percent.
The country’s unexpectedly low inflation rate, at 0.1 percent in November — far from the central bank’s two-percent target — has been lower than domestic cost pressures, putting increasing pressure on the export-oriented economy.
The bank said that “companies have had difficulty in passing on their higher costs through higher prices, which in turn may be due to weak demand.”
International and Swedish analysts had expected the rate cut, given earlier warnings of surprisingly low inflation.
“Lower rates will stimulate the economy,” wrote the business daily Dagens Industri after the announcement, “and put more effective pressure on inflation which is at the lowest possible level.”
The bank said it expects higher growth in 2014 driven largely by increased demand for exports in the US and euro area.
“The recovery abroad is important to the Swedish economy, which after almost a year of weak growth is now moving towards better times,” the bank wrote.
“The labour market has improved and confidence in the Swedish household and corporate sectors has continued to rise. Together with increasing demand from abroad, this means that growth will pick up next year.”