Swedish Riksbank Cuts Rates to Zero Percent

Citing undesirably low inflation, the Swedish central bank cut its main policy rate to zero percent today. The news weighed on the value of the Swedish currency, and we see further krona depreciation ahead. 

Sweden’s Central Bank is Latest to Take Rates to Zero Percent

The Riksbank (the central bank of Sweden) surprised many analysts today when it cut its main policy rate to zero percent from 0.25 percent where it had been maintained since July (top chart). The Riksbank joins a number of other major central banks (e.g., the Federal Reserve, the European Central Bank and the Swiss National Bank) that have cut their main policy rates essentially to zero percent. The central bank also took its deposit rate further into negative territory (to -0.75 percent from -0.50 percent previously) and it reduced its lending rate to 0.75 percent from 1.00 percent. 

In announcing its decision, the Riksbank said that economic growth in Sweden is “continuing to improve”—the year-over-year rate of real GDP growth rose to 2.6 percent in Q2-2014 from 1.7 percent in Q1—but that “inflation is too low.” Indeed, the overall consumer price index was down 0.4 percent on a year-ago basis in September, and the core rate of CPI inflation, which excludes food and energy, was flat (middle chart). The Riksbank hopes that lower interest rates will stimulate demand, especially in interest rate-sensitive spending such as residential investment and durable goods consumption. Stronger growth in economic activity should eventually lift the overall inflation rate back towards the central bank’s target of 2 percent. Moreover, the Riksbank said that it expects that the repo rate will remain at zero percent until “the middle of 2016.” Previously, it had expected to maintain its repo rate at 0.25 percent until “the end of 2015.” 

The central bank also noted that sluggish economic activity in the euro area, to which Sweden sends 40 percent of its exports, will continue to weigh on Swedish export growth, thereby exerting some headwinds on the Swedish economy. (On a sequential basis, net exports sliced nearly a full percentage point from overall GDP growth in Q2-2014 because real exports rose at an annualized pace of only 3.2 percent while real imports were up 5.8 percent.) 

Further Krona Depreciation Ahead

Stronger economic growth in Sweden’s major trading partners, which the Riksbank is confident will eventually transpire, would help the outlook for Swedish exports. Depreciation of the Swedish krona, would also help to support export growth. In that regard, the value of the currency, which is down about 5 percent and 13 percent vis-à-vis the euro and the U.S. dollar respectively since the beginning of the year (bottom chart), took another hit in the aftermath of the Riksbank’s announcement today. Looking forward, the Wells Fargo Currency Strategy team expects that the krona will continue to trend lower versus the greenback as the Federal Reserve tightens while the Riksbank maintains an accommodative policy stance.