July 3, 2018 / 8:56 AM / 3 months ago

Swedish central bank holds rates, sees hike near year-end

STOCKHOLM (Reuters) - Sweden’s central bank kept policy unchanged on Tuesday and stuck to a forecast that it will kick off a cycle of cautious interest rate hikes toward the end of 2018, with a minority of rate-setters calling for earlier action.

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

Despite strong economic growth, the central bank has repeatedly pushed back the anticipated start of its move away from record low borrowing costs as underlying inflation has remained stubbornly sluggish.

This time the Riksbank upped its forecast for CPIF - its favoured measure of inflation which strips out mortgage rates - to 2.1 percent from 1.9 percent for both this year and next.

CPIF inflation has hovered around the bank’s 2 percent target since early last year.

Nevertheless, the majority of rate-setters remain worried that temporary factors - higher energy prices and a weaker crown - are behind that pick-up, and inflation excluding volatile energy prices was just 1.5 percent in May.

“Our judgement is that inflation pressure is currently moderate and uncertainty in the outside world has increased,” Governor Stefan Ingves told a news conference on Tuesday after the bank kept its headline repo rate at -0.50 percent.

“If you weigh those things together, that points to the fact that it is most appropriate to keep to the path we have outlined earlier, which is to hold off with rate hikes until the end of the year.”

Also supporting further policy caution, the Riksbank has been keen not to give the crown a boost by leaping ahead of any tightening cycle from the European Central Bank (ECB).

The local currency strengthened after the decision. EURSEK=

DIVISIONS

Rate-setters were split over the timing of what will be Sweden’s first hike since July 2011.

Deputy Governor Henry Ohlsson voted on Tuesday for a 25 basis point rate increase, the third meeting running in which he has called for higher rates. Deputy Governor Martin Floden advocated a rate path that indicated an initial increase of 0.25 percentage points in September or October.

But Deputy Governor Per Jansson has previously said that rate hikes can probably wait until next year, while Ingves and First Deputy Governor Kerstin af Jochnick have also backed a cautious line.

Analysts are also split.

“We think that the more dovish members of the Executive Board are to remain on top, with the Bank waiting until December to raise interest rates,” Jack Allen at Capital Economics said in a note.

Others see inflation remaining subdued, while concerns ranging from global trade tariffs, the Italian economy and a dovish ECB mean the Riksbank will again push back the start of policy tightening.

“It is not good enough to have inflation that is held up by the currency and energy price,” Stefan Mellin, economist at Danske Markets said.

“At the end of the day, we believe that the Riksbank will postpone its rate hike so that it hops over into next year.”

A Reuters poll before Tuesday’s decision had forecast no change to rates or to the rate path. The majority of analysts saw a hike in the fourth quarter.

Reporting by Stockholm Newsroom; editing by John Stonestreet

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