Sweden's Riksbank Sits Tight as Currency Strengthens -- 2nd Update

By Nina Adam Features Dow Jones Newswires

Sweden's central bank on Thursday signaled that a small interest rate increase is still many months off--highlighting the caution of Europe's central banks as they try to balance the effects of a strengthening currency and an improving economy.

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"Monetary policy needs to remain expansionary for inflation to continue to be close to 2%," the Riksbank said, noting that it does not expect to lift the repo rate from its current record low of minus 0.5% "until the middle of 2018."

A strengthening national currency may have also influenced the decision. "It is important for the development of inflation that the krona exchange rate does not appreciate too quickly," the Riksbank said, after the krona appreciated almost 3% since mid-June. A stronger currency doesn't only hurt the international competitiveness of Sweden's exporters, it also reduces the price of imports, and hence weighs on the outlook for inflation.

Some private-sector economists have been questioning the bank's ultraloose policy stance against the backdrop of solid economic growth and rising inflation.

But the Riksbank isn't the only central bank in Europe performing a balancing act. The euro's recent spurt also complicates the European Central Bank's job, as it threatens to hurt the region's recovery at a time when the ECB is looking to reduce its EUR2.3 trillion ($2.7 trillion) stimulus program, known as quantitative easing.

Investors are hoping that ECB President Mario Draghi will give some guidance on the ECB's stimulus program at a regular news conference later on Thursday.

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Separately, the Riksbank on Thursday unveiled changes to its inflation-targeting framework--a move, economists say, will have little effect on the central bank's near-term policy outlook, but may affect its behavior over a longer period.

The Riksbank is now targeting the CPIF inflation measure, which--unlike the traditional CPI measure--isn't directly affected by changes in mortgage rates. It is also applying a "variation band" of plus/minus 1 percentage point for the annual inflation rate, which it aims to keep at 2%.

"It is a small step towards increased flexibility and may make the Riksbank less eager to act if inflation deviates from the target," Torbjoern Isaksson, an economist at Nordea, said ahead of the widely expected move.

Following a string of strong data, the Riksbank lifted its outlook for the annual CPIF rate and now projects inflation of 2% this year, 1.9% in 2018 and 2.1% in 2019. It also sharply raised its economic growth forecast for this year to 3.2% compared with an earlier estimate of 2.2%.

But, despite the revisions, the Riksbank kept the projected path for the repo rate unchanged, a reflection of its caution.

"After today's decision, we continue to expect QE purchases to come to an end at the end of the year, and we continue to expect a first 10 basis point rate hike to take place in July 2018," said Raphael Brun-Aguerre, an economist at JP Morgan.

Write to Nina Adam at nina.adam@wsj.com

(END) Dow Jones Newswires

September 07, 2017 05:48 ET (09:48 GMT)