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INTEREST RATES

Interest rates to stay low until autumn 2010

Sweden’s central bank has pledged to hold its benchmark interest rate, the repo rate, at 0.25 percent until next autumn in a bid to keep interest rates low for business and households.

Published: 3 September 2009 12:22 CEST

Interest rates to stay low until autumn 2010

Riksbank chief Stefan Ingves

The repo rate is the discount rate at which the central bank repurchases government securities from the commercial banks. A low repo rate mean that banks can swap their holdings of government securities for cash cheaply, which increases the money supply and puts downward pressure on general interest rates.

While the Riksbank noted signs of a turnaround in the economy, it said the recovery is from a low level, and so its decision to keep interest rates low should continue to stimulate the economy. The central bank expects the rate to remain at 0.25 percent until autumn 2010.

The Riksbank also announced further measures that should lead to lower interest rates for both companies and households: “The Riksbank has decided to offer further loans totalling SEK 100 billion to the banks at a fixed interest rate and with a maturity of approximately 12 months. This should contribute to continued lower interest rates on loans to companies and households,” the central bank said in a press release.

While the Riksbank believes that Sweden will return to positive economic growth by the end of the year, it does not see the job market improving until 2011.

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Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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