The Swedish Economy August 2012

The Swedish Economy August 2012 27LOW REPO RATE FOR THE NEXT SEVERAL YEARSThe strengthening of the krona this year and weak resourceutilization in the economy mean that inflationary pressure in theeconomy will remain low. CPIF inflation will not reach2 percent until after 2016. The repo rate will remain at 1 percentuntil mid-2014, when the Riksbank will gradually begin raising it.The low repo rate will help the Swedish economy to recover inthe years 2013–2016. As resource utilization and inflation go up,the Riksbank will gradually raise the repo rate.When resource utilization is more or less balanced in 2015,the repo rate will be just below 3 percent, a much lower reporatelevel than has historically been compatible with balancedresource utilization. The principal reason is that policy ratesabroad are low, particularly in the euro area (see Diagram 46). Ifthe repo rate were to be raised faster, and thus follow moreclosely the historical relationship between the repo rate, resourceutilization and inflation, the krona would strengthen even further.This would curtail resource utilization and inflation to agreater degree than is desirable.Diagram 46 Policy RatesPercent, daily values65432100608USEuro areaSweden10Sources: Federal Reserve, ECB, The Riksbank andNIER.1214166543210INTERNATIONAL LONG-TERM INTEREST RATES ONCENTRAL GOVERNMENT BONDS STILL AT A RECORD LOWBoth Swedish and international long-term interest rates on governmentbonds were at roughly the same level in mid-August asin June. The principal explanations for the historically low longterminterest rates are the continued weak prospects for growthin the global economy and expectations of continued low policyrates and other expansionary measures, such as the purchase ofinterest-bearing assets by central banks. Interest rates on governmentbonds in countries considered safe have also fallen as aconsequence of increased inflows in response to the uncertaintyabout developments in the euro area. The countries that appearto have received the bulk of these inflows are Australia, Canada,Germany, Sweden, Norway, Denmark, Switzerland, the UnitedStates and the United Kingdom. In some of these countries, theinflows have been so strong that interest rates on bonds withshort-term maturities have even carried a negative nominal interestrate (Switzerland and Germany, for example). The interestrate on Swedish 10-year government bonds has remained at thesame level as its German equivalent. However, Sweden’s interestrate on a two-year government bond is about 1 percentage pointabove the German rate. The difference is due primarily to expectationsthat the policy rate will be higher in Sweden than in theeuro area for the next few years.The recovery of the global economy is expected to be sluggish,and central banks in several countries are continuing tofacilitate recovery by pursuing an expansionary monetary policy.This will help to hold down interest rates on government bondsin coming years (see Diagram 47). However, both Swedish andinternational long-term interest rates will rise as uncertaintyDiagram 47 Government Bond InterestRatesPercent76543210002GermanyUSSweden0406Note. 10-year maturity.081012Sources: National sources and NIER.14167654321