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.
"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."
Continue Reading Below
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 ultra-loose 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.
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.
Write to Nina Adam at email@example.com
(END) Dow Jones Newswires
September 07, 2017 05:14 ET (09:14 GMT)