FRANKFURT (MktNews) - Sweden's Riksbank left interest rates unchanged Thursday, as expected, after having cut them 25 bp each of its last two meetings. The Riksbank also indicated that it had adopted a neutral policy stance that cou#ld see them move interest rates in either direction in the period ahead depending on developments. It warned again of the current high uncertainty in the economic and inflation outlook due to geopolitical risks.
The Riksbank left its repo ra#te at 3.75%, after having cut it by 25 bps on Nov. 14 and again on Dec. 4. In a statement accompanying its rate decision, the Riksbank warned that inflation this year would be higher than previously expected, and above its 2% target, due to #higher energy prices. However, these energy price rises are expected to be temporary, allowing inflation to fall below target in 2004. At the end of its two year forecast period, Swedish inflation is seen being in line with the 2% target. Bu#t the Riksbank stressed the uncertainty surrounding the economic outlook, due largely to the Iraq conflict. And it suggested that if the international situation were to stabilise, it would then have to address its domestic inflation concerns.
# Thus, in line with comments it made on Dec. 4, when it cut its repo rate for the second time in as many months, the Riksbank indicated that it was likely to cut rates further only if the international economic picture deteriorated further than it n#ow expected. On Dec. 4, it had warned that that day's rate cut was "not self evident." "The risk spectrum is dominated by the international security policy situation. The actual uncertainty concerning the consequences of a potential war in I#raq and the possibilities of achieving stability in the region may entail a slower than expected development in investment and growth throughout the entire OECD region. This reinforces the uncertainty in the financial markets," the Riksbank said.
# "These problems are currently overshadowing the more normal risks that should be taken into account when assessing inflationary pressure during the forecast period. In this perspective, i.e. one to two years ahead, there are risks for inflation# connected with both potential contagion effects from the energy price rises and with wage formation," the Riksbank noted. "The current assessment is that inflation will be above the inflation target level in 2003 and below the target level #in 2004. This is largely due to the severe fluctuations in energy prices, which are assessed to be primarily of a temporary nature. At the end of the forecast period, inflation is expected to be in line with the Riksbank's target level. This, toget#her with the considerable uncertainty currently prevailing in the global economy, speaks in favour of leaving the repo rate unchanged at present," the Riksbank said.
"The future direction for monetary policy will depend, as usual, on the inc#oming data and how this affects the total assessment of future inflation in the coming years," the central bank concluded. //www.marketnews.com