Economists React: Riksbank Rate Cut Catches Economists Off Guard

//Economists React: Riksbank Rate Cut Catches Economists Off Guard

Economists React: Riksbank Rate Cut Catches Economists Off Guard

Sweden’s central bank caught economists by surprise on Thursday, as it made an unexpectedly large cut to its main interest rate, sending Sweden’s krona plummeting against both the euro and dollar.

The Riksbank–the world’s oldest central bank–cut its main repo rate to 0.25% from 0.75%, in an effort to boost Sweden’s sagging inflation rate which has long fallen short of the central bank’s 2% target. All analysts polled by the Wall Street Journal had expected a cut to 0.5%.

Here’s what economists had to say about the surprise move:

Anna Raman at Denmark’s Nykredit said the 50 basis point rate cut and the lower path for future interest rates indicated by the central bank shows that the Riksbank has entered “panic mode,” and added that it’s remarkable that the Riksbank Governor Stefan Ingves and Deputy Governor Kerstin af Jochnick were outvoted.

The decision marked the first time that the Riksbank Governor has been outvoted in a rate call since the policy-setting board became independent in 1999. Ms. Raman added that the probability of further rate cuts is slim, and noted that apart from inflation, the Swedish economy and the labour market is on the right track.   “We anticipate that the Riksbank will revise its rate path higher during autumn and winter,” she said. “The first rate hike will come in summer 2015 at the earliest – but the split monetary policy board is causing uncertainty.”

Economists at Sweden’s SEB said another rate cut by the Swedish central bank this year cannot be ruled out and noted that the Riksbank is signaling a 12% probability for a September cut and has moved the timing for the first predicted rate hike to the fourth quarter of next year, more than six months later than its previous forecast. They added that the Riksbank continues to forecast a faster return to the 2% inflation target than SEB, meaning “there is a decent chance that inflation will continue to surprise on the downside.”

Handelsbanken, meanwhile, said the surprise move is a significant signal to Swedish lawmakers that they now have the responsibility to manage risks in the housing market, as well as increased household indebtedness.

“We see the possibility that interest rate increase comes earlier, as we expect a sharp turnaround in inflation developments after the summer. In this context, we do not expect much further weakening potential of SEK going forward,” said Handelsbanken’s Rasmus Gudum-Sessingo.



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By | 2014-07-03T19:48:21+00:00 July 3rd, 2014|Economics|

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