Swedish Central Bank Holds Rates Steady -- 2nd Update

By Charles Duxbury 

STOCKHOLM--Sweden's central bank has decided against any dramatic new policy moves in the face of subdued inflation and slowing growth, opting instead for a promise to keep rates low for longer and listing the unconventional policies that it might turn to.

The central bank, which held its main lending rate at zero on Tuesday, has been under pressure from labor organizations and some economists here to take decisive action to lift an inflation rate which has been negative for the past four months.

While the economy here is still posting steady growth, concerns are rising that Sweden is flirting with deflation, a situation where prices fall persistently, sapping consumers' will to spend and making debts harder to service.

The central bank surprised the market in October when it cut its main rate to zero seeking to reverse the inflation slide but this time left rates unchanged after a policy meeting.

Governor Stefan Ingves said lower oil prices meant the Riksbank needed to cut its inflation forecasts again despite a weaker currency. Still, the six member board stopped short of unconventional policy measures.

Instead the board voted unanimously to postpone a first rate hike until later 2016 from mid-2016.

The central bank said if more expansionary policy were needed in the future, its next step would be to continue to postpone increases to its main rate.

Mr. Ingves also took the chance to be more specific about what they bank will do beyond that if the outlook for inflation were to continue to worsen.

At his news conference he listed four broad options: asset buying; lending to banks; a negative main rate; currency market interventions.

He didn't give an order of preference for the eventual measures other than to say a move into the currency market, while not ruled out, is the bank's least favored option.

The first three could also be combined, Mr. Ingves said, and wouldn't have to come one after another.

Trading in the Swedish krona was choppy but by midafternoon in Europe the euro was close to being back where it started the day, at 9.50 Swedish kronor.

Analysts were divided in their assessment of how Riksbank policy will develop next year.

James Pomeroy at HSBC bank said inflation probably wouldn't rise as fast as the Riksbank expected and the central bank will have to respond by cutting the main rate into negative territory next year.

Nordea bank analyst Torbjorn Isaksson said that while the Riksbank may go as far as postponing rate hikes still further he judged the use of other monetary policy measures as "not particularly likely".

Write to Charles Duxbury at [e-mail]

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