Riksbank keeps rates stable amid slow growth

Sweden's central bank said on Thursday it's leaving the benchmark interest rate, the repo rate, unchanged at one percent, but did adjust its interest rate forecast downward.

Riksbank keeps rates stable amid slow growth

“Anything other than an unchanged rate would have been a surprise,” Heidi Elmér, head economist at Skandia bank, told the TT news agency.

In its previous interest rate prognosis, the Riksbank forecast that the repo rate would be at 1.25 percent by the end of 2014, but Thursday’s interest rate decision forecasts the interest rate will only be at 1.15 percent.

However, the Riksbank was generally upbeat in its prognosis for the Swedish economy, despite forecasting slightly lower growth.

“Following the slowdown in recent years, the outlook for the Swedish economy is brightening. There has been some improvement in the labour market and this is expected to become clearer during 2014,” the central bank said in a statement.

“There are signs of an improvement in the euro area and the recovery in the United States is continuing. However, major challenges still remain.”

Previously, the Riksbank had forecast the Swedish economy would grow by 1.2 percent in 2013, but that figure has been adjusted downward to 0.7 percent. Economic growth is expected to pick up in 2014, landing at 2.6 percent, before inching up to 3.5 percent in 2015, figures more or less on par with the Riksbank’s previous forecasts for the years ahead.

The Riksbank set the continued economic recovery abroad will have positive effects on the export-dependent Swedish economy and that low interest rates and expansionary fiscal policy will help buoy Swedish consumer spending.

“Growth in Sweden is thus expected to be gradually higher, which means that employment will rise at a faster pace and unemployment will fall,” the Riksbank said.

Riksbank Deputy Governors Karolina Ekholm and Martin Flodén entered reservations against the decision to keep the repo rate at one percent, arguing it should be lowered to 0.75 percent.

While some have criticized the Riksbank for keeping interest rates too high, Skandia’s Elmér thinks the bank made the right decision.

“It’s clear there are reasons to lower it a step, when looking at inflation. But we see signs that the economy is beginning to heat up. Then there are other factors like imbalances among households, with high debts and home prices that are creeping up. In this case, I think we should wait to change rates,” she said.

TT/The Local/dl

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How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”