July 4, 2017 / 7:41 AM / 3 months ago

Swedish central bank signals policy shift as holds rates

A view of an entrance of Sweden's central bank in Stockholm, Sweden, August 12, 2016. REUTERS/Violette Goarant

STOCKHOLM (Reuters) - Sweden’s central bank took a step towards reversing course on Tuesday after more than two years of negative interest rates, saying it did not expect to cut borrowing costs again while not closing the door entirely on further easing.

The Riksbank kept its benchmark repo rate at -0.50 percent and its bond purchase programme at 290 billion Swedish crowns (£26 billion), as forecast by all 17 analysts in a Reuters poll published on Friday.

They had also expected it to follow the lead of the European Central Bank and its counterpart in Norway by drawing a line under further rate cuts.

After a decade of ultra-loose monetary policy across much of the world’s financial system, many developed economies’ central banks are trying to map out a path towards weaning markets off cheap money without upsetting the recovery.

The Riksbank said higher inflation and a more stable international picture made it “less likely than before that (we)... will cut the repo rate in the near term”.

The crown weakened slightly to 9.6890 to the euro after the bank also said it did not rule out more rate cuts.

But analysts said its overall tone fitted in with the global policy picture.

“The near-term easing bias was dropped, underlining the importance of other central banks,” Nordea chief analyst Torbjorn Isaksson said in a note.

“Improved global growth prospects, reduced deflation fears, less political risks and higher inflation expectations have led to less dovish messages from central banks in general, now also including the Riksbank”.

FOCUSING MINDS

Last month, the Bank for International Settlements called on major central banks to push forward interest rate increases, focusing investors’ minds on the challenges of shifting away from ultra-loose policy.

The U.S. Federal Reserve has hiked four times since the financial crisis and looks like continuing to do most of the heavy lifting, though other central banks have started to tentatively prepare the ground for similar moves.

The euro and the pound strengthened after what markets viewed as more hawkish comments from European Central Bank President Mario Draghi and Bank of England Governor Mark Carney.

With Sweden’s economy in rude health, the Riksbank’s transition to normalising policy should theoretically be among the easiest, especially as negative rates are causing imbalances such as runaway house prices and household borrowing.

Even Swedish inflation has surprised on the upside recently.

But the central bank, which has used a weak crown to build price pressures, has insisted that inflation should hit 2 percent before it changes course, meaning it is likely to remain on the dovish side for some time.

“When it comes to monetary policy, it is much too early to make it less expansive,” bank Governor Stefan Ingves told a news conference following the policy decision.

SEB chief economist Robert Bergqvist said he expected the crown’s importance for monetary policy to diminish. “I think the Riksbank will accept a gradually stronger crown, down to 9.30 against the euro, without being scared,” he said.

The central bank publishes its next policy decision on Sept. 7.

Additional reporting by Daniel Dickson and Johan Ahlander; editing by Niklas Pollard and John Stonestreet

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