September 7, 2017 / 8:45 AM / 19 days ago

Swedish central bank keeps policy ultra-loose as eyes ECB and crown

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

STOCKHOLM (Reuters) - Sweden’s central bank left its ultra-loose monetary policy unchanged on Thursday, bypassing signs that the economy is overheating in favour of keeping the crown weak to support an upturn in inflation.

Central banks around the globe are puzzling over how to normalise policy as their economies begin to recover.

The U.S. Federal Reserve and the Bank of Canada have already moved part of the way down that path while the European Central Bank, which is also meeting on Thursday, may soon start to wind down its 2.3 trillion euro asset purchase programme.

But continued worries over sluggish inflation are slowing down that process and, despite warnings from analysts that the Swedish economy is overheating and concerns about a housing bubble, the Riksbank presented a dovish policy outlook.

“The economic signals from abroad are good, but global inflation remains subdued,” the central bank said in a statement.

“Compared with the forecast in July, there are now expectations of a somewhat more expansionary monetary policy in many countries that are important to Sweden.”

The central bank said domestic inflation had been stronger than expected. “However... economic activity needs to continue to make an impact on price development.”

It stuck to a forecast that rates would not start to rise until the middle of 2018.

The Riksbank is worried tightening policy too quickly would push up the crown and send inflation tumbling again after only just having seen price rises get back on track.

The Swedish currency weakened against the euro following the central bank’s statement. EURSEK=

OUT OF STEP?

But its ultra-loose policy risks falling out of step with an economy that has expanded at above trend rate for several years and should not slow appreciably as the rest of the world picks up speed, drawing in Swedish exports.

“The Riksbank is committed to reach the (inflation) target at all costs and they don’t want to risk inflation losing steam now,” Nordea Chief Economist Annika Winsth said.

A shift in policy will probably have to wait for a more hawkish stance from the ECB, which is widely expected to hold rates unchanged later on Thursday. A clear tightening signal from Frankfurt would take the pressure off the crown.

But the euro zone has its own exchange rate troubles with the common currency having climbed around 13 percent against the dollar EUR= since the start of the year.

That could slow any tapering of the ECB’s quantitative easing programme, forcing the Riksbank to keep buying bonds well into next year.

All analysts in a Reuters poll expected the Riksbank to keep rates on hold. A slim majority expected the bank to hike rates in the second quarter in 2018.

Reporting by Simon Johnson, Niklas Pollard, Daniel Dickson and Johan Ahlander; editing by John Stonestreet

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