Sweden has confounded investor expectations and left its central bank repo rate unchanged. Economic activity is strong and inflation is approaching 2%, the Riksbank notes in its explanation of this morning's decision.
The Riksbank’s monetary policy has contributed to this. But it has taken time to stir up inflation. A continued expansionary monetary policy is required for it to stabilise around 2 per cent, the central bank adds.
The formal announcement states that the Executive Board of the Riksbank has decided to hold the repo rate unchanged at −0.50 per cent. It adds that the first rate increase is not expected to be made until the middle of 2018, which is the same assessment as in April.
Bond purchases to continue unchanged
Purchases of government bonds will continue during the second half of 2017, as decided in April. At the end of the year total purchases of government bonds will amount to SEK 290bn, excluding reinvestments.
Maturities and coupon payments will be reinvested until further notice. International economic activity is increasing in line with the Riksbank's forecasts. The risk of setbacks has declined, but there is still economic and political uncertainty in many parts of the world.
Global inflationary pressures are still subdued and monetary policy abroad is expansionary, says the Riksbank. It adds that its low policy rate and extensive purchases of government bonds, has contributed to strong economic activity with a rapid rise in employment.
Important that inflation stabilise
Inflation has been below-target for a long time. This means there is a risk of inflation expectations being more sensitive than usual to downside surprises, it continues. Given this, it is now especially important that inflation stabilises more lastingly close to the target.
A prerequisite for this is that economic activity continues to be strong and gradually has a greater impact on price development. In addition to continuing robust economic activity, it is important that the krona does not appreciate too rapidly.
The Riksbank points out that this could happen if, for example, its monetary policy deviates clearly from that of other countries.
The international financial media have been buzzing in recent days with predictions that monetary policy in Europe is about to enter a tightening phase. The fact that several senior European Central Bank figures are to make speeches this week has grabbed the attention.
The Financial Times featured a story saying that more than two-thirds of investors surveyed by Swedish bank SEB said they expected the Riksbank to remove its bias towards easing this week.
The same story featured a comment suggesting that central banks have quietly executed a policy about-turn and could be looking for excuses not to tighten after all. This is not confined to Europe.