Riksbank leaves interest rates unchanged

The Riksbank decided on Tuesday to leave the leave Sweden’s benchmark interest rate unchanged at 0.25 percent, but indicated that rate hikes were likely later in 2010.

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In announcing its decision to leave the repo rate unchanged, Sweden’s central bank cited the continuing economic recovery and low inflationary pressures.

“The world economy is continuing to improve and this benefits economic developments in Sweden,” the bank said in a statement.

“Households and companies have become more optimistic regarding future developments and consumption is increasing.”

The bank revised its growth forecasts for 2010 upwards, now projecting Sweden’s economy will grow by 2.7 percent instead of the 2.5 percent forecast in October.

At the same time, however, the bank expected Sweden’s GDP to grow by only 3.5 percent in 2012, down from the previously forecast 3.7 percent.

The Riksbank added, however, that uncertainty remains, citing weak industrial production as one reason for continued caution regarding the pace of the current recovery.

The bank also left the forecast for the benchmark rate unchanged, saying that the repo rate would “remain at this low level until autumn 2010 and then to be raised towards more normal levels”.

In projecting the expected future interest rate path, the Riksbank said the repo rate will be close to 0.4 percent by the fourth quarter of 2010. A year later, it will have risen to around 2.4 percent before reaching 4.1 percent by the fourth quarter of 2012.

The future direction Sweden’s monetary policy will ultimately depend, however, on how economic developments abroad and in Sweden affect inflation and economic activity in Sweden, the bank added.

The Riksbank also noted that the labour market doesn’t appear as weak as in previous forecasts, but that unemployment is nevertheless expected to rise, which will keep inflationary pressures low for the coming year.

Inflation expectations were also lower in the bank’s new forecast, expected to reach 0.8 percent next year before jumping to 3.0 percent in 2011.

Earlier projections had inflation hitting 0.9 percent in 2010 and 3.3 percent in 2011.

The Riksbank board was not unanimous in its decision to hold rates at 0.25 percent, with Deputy Governor Lars E.O. Svensson advocating a further cut to 0.0 percent and a repo rate path 0.25 percent below the bank’s accepted scenario.