“It was not deemed justified at this point in time to try to increase demand by lowering the repo rate when the downturn in the economy is due to imposed restrictions and people's concerns about the spread of infection,” said the Riksbank, which abandoned Sweden's negative interest rate in December for the first time since 2015.
“However, this does not rule out the possibility of the interest rate being cut at a later date if this is deemed an effective measure to stimulate demand and support the development of inflation in the recovery phase.”
The statement said that the bank's executive board had also decided to continue purchasing government and mortgage bonds until the end of September, in line with a decision on March 16th to purchase securities of up to 300 billion kronor during the year.
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Despite a relatively softer approach to coronavirus lockdowns than seen in many other countries, Sweden's economy is still expected to be hit hard by the crisis according to several government scenarios. But the Riksbank said it was difficult to say at this stage exactly how deep the economic downturn will be.
“The extensive restrictions imposed in order to limit the spread of the coronavirus have caused a sharp slowdown in activity in the global economy. This dramatic development has completely changed the economic prospects for both Sweden and the rest of the world. Many companies will be hit hard and many people will lose their jobs.”
The Riksbank fears that unemployment could rise to 10.1 percent this year in the worst-case scenario, with a further rise to 10.4 percent next year. GDP meanwhile, according to the same estimate, could fall by -9.7 percent this year, and slowly climb back with a 1.7 percent recovery in 2021.
In an alternative scenario, with a better economic outlook, unemployment would fall to 8.8 percent this year and 9.0 next year; and GDP would drop by -6.9 this year and bounce back 4.6 percent next year.