Riksbank expected to leave repo rate unchanged

The Swedish Riksbank is seen leaving the repo rate unchanged at 3.25 percent at its monetary policy meeting on Thursday.

The unchanged rate is forecaset after the bank cut its CPI forecast for 2007 to 1.5 percent from 2.0 percent in its last inflation report, and signalled a cautious approach to future rate hikes, said economists polled by AFX.

The Riksbank hiked the repo rate by 25 basis points in February and said it believes it will need to be raised by a further 25 basis points within the next 6 months.

However governor Stefan Ingves said in a speech last week that the bank will take a ‘moderate’ approach to rate hikes leading analysts to forecast it will not raise them again until its June inflation report.

“We think they will keep rates on hold on March 29th. The signals in the bank’s February report were clear, they see very low inflation despite strong growth,” said Torbjorn Isaksson, economist at Nordea.

Sweden’s low inflation is due in part to low cost pressures in the last couple of years up to and including 2006 on slow growth, which also pushed up unemployment and reduced wage pressure. High productivity growth, cheap imports and healthy domestic competition have also played an important part.

With the Swedish economy now recovering strongly, Isaksson sees wage and other cost pressures picking up slightly ahead.

“But it’s still more of a normalisation of cost pressure, and we don’t think that inflation will be problematic, and hence the Riksbank can keep rates rather low,” he said.

As such economists don’t currently see the Riksbank hiking again after its June meeting for the remainder of the year.

Isaksson expects the important UND1X inflation index to fall to 0.5 percent by the middle of the year from slightly above 1 percent today, due to electricity prices.

“After that, we do believe that domestic inflation will pick up. But the starting point is very low, and the increase will be slow,” he said.

“Competition is very strong both in Sweden and in the world so its difficult for producers to raise prices,” he added.

The bank will announce the outcome of its monetary policy meeting on Friday March 30th at 9.30am.