Tuesday, the Swedish central bank lowered its key interest rate for the fifth session in a row, taking it to a new low. The central bank hinted that there would be further reduction in the rate in future and may use additional measures if needed.
The Riksbank, considered the world's oldest central bank, said in a statement that the Executive Board has decided to cut the repo rate by 0.5 percentage points to a new low of 0.5%.
According to the central bank, lower interest rate and interest rate path are necessary to dampen the fall in production and employment and to attain the inflation target of 2%. The central bank expects the repo rate to remain at a low level until the beginning of 2011.
The latest rate cut will take effect from April 22. The deposit rate was cut to 0% and the lending rate to 1%. The minutes of the latest rate-setting session will be published on May 5.
Further, the Riksbank announced that its deputy governor Lars Svensson entered a reservation against the latest decision and advocated a cut in the repo rate to 0.25%. The policymaker also sought an interest rate path where the repo rate is kept at this low level for a longer period of time, some quarters into 2011.
The central bank forecasts the economy to contract 4.5% this year and to grow 1.3% next year. The decline in 2009 would be the largest in Swedish GDP in an individual year since 1940 when it fell by just over 9%.
The consumer price index is predicted to fall 0.3% in 2009 and then to rise 1.3% in 2010.
The Swedish Krona that tumbled to near a 6-week low of 8.7435 against the dollar at 3:25 am ET Tuesday reversed direction thereafter following the monetary policy announcement.
As the key interest rate is nearing zero, the scope for the central bank to use traditional measures are also reaching its limit. If the prospects for economic activity deteriorate further, there is a possibility to supplement the regular monetary policy with purchases of government bonds and possibly also mortgage bonds, as is already being done in a number of other countries, the bank said in its monetary update.
Central banks of the developed countries have already adopted quantitative easing measures. The U.S. Federal Reserve, the Bank of Japan, and the Bank of England are some of them.
The Swedish government has allocated a total of SEK 45 billion in 2009 and SEK 60 billion in 2010 to combat the crisis. The government will continue to monitor the situation to see if additional measures are needed, the finance ministry said on April 15. However, the government sees little scope for additional reforms.
On April 1, the finance ministry had lowered GDP estimates for this year and the next two years citing lower demand due to economic crisis. The ministry expects the economy to contract 4.2% in 2009, a sharp revision from its December forecast of a 0.8% decline. It lowered 2010 growth outlook to just 0.2% from 1.5% expansion initially projected. The government forecast the unemployment rate to rise to 8.9% this year and to increase until 2011 to reach 11.7%.
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