STOCKHOLM, July 4 - Sweden's central bank cut its key repo interest rate by 25 basis points to 2.75 percent on Friday, saying inflation one to two years ahead would be below target and the economy would still not be working at full steam. Economists had expected a 25 basis point cut now or at the next meeting on August 14, and the reaction in the financial markets was muted. The cut is the third this year and comes only a month after a 50 basis point reduction on June 4. The bank said the June cut had contributed to a slight improvement in prospects for the real economy and would slightly increase resource utilisation over the coming years.
"However, the assessment is still that there will be unutilised resources during the forecast period. UND1X inflation is expected to be below the inflation target both one and two years ahead. Given this, the assessment of the Executive Board is that there is scope to further lower the repo rate," it said. The bank noted that inflation in May was slower than it had expected at 1.9 percent year-on-year. Its monetary policy target is to keep inflation around two percent over a two year horizon. The UND1X inflation, which measures price growth without indirect taxes and subsidies and mortgage interest costs, and is the basis of the bank's policy, eased to 2.0 percent in May. The Riksbank also noted that since its last interest rate cut on June 4, other central banks, notably the Federal Reserve and the European Central Bank, also reduced their reference rates to spur the economy amid slow inflation. The repo rate in Sweden, a member of the European Union but a euro zone outsider, is still 75 bp above the ECB's key refi rate. Sweden will hold a referendum on whether to join the euro on September 14 and lower ECB rates are among the top arguments of the pro-euro camp.
The Riksbank said stronger than expected first quarter GDP growth of 2.2 percent in Sweden was fuelled mainly by government spending and inventory build-up and the lower interest rates aimed to boost private consumption for balance. Economists said that after the latest rate reduction the Riksbank was likely to take a longer breather before making more rate changes. "I think the Riksbank's risk scenario is moving into a more neutral direction after this reduction and this has definitely reduced the chance of another 25 bp cut in August unless we get further weak data," said analyst Michael Grahn at Danske Consensus. The Swedish crown eased to 9.1782 against the euro after the cut from 9.1662 before and bond yields eased across the board with the two-year paper down to 3.13 percent from 3.20 percent. The anticipated rate cut had little effect on the Stockholm bourse, brokers said.//