Swedish c.bank to maintain pandemic support, could cut rates if needed

Most analysts expect recovery to resume around the middle of the year, but the level of uncertainty is high amid worries about whether new virus mutations will cause a third wave of infections and the slow start to Sweden's vaccination programme due to delivery delays. "In a scenario where the need for monetary policy support increases further, I consider it fully possible to cut the repo rate," Riksbank First Deputy Governor Cecilia Skingsley said.

Sweden's central bank will do what is needed to support the economy through the pandemic and could cut the benchmark interest rate if necessary, the minutes of its most recent policy meeting, published on Friday, showed. After a relatively swift recovery from the first outbreak of the pandemic - GDP only shrank about 2.8% in 2020 - Sweden's economy has slowed again in recent months due to a fresh wave of infections that hit in the autumn.

Infection rates have eased since, but while Sweden has avoided the kind of strict lockdown adopted across much of Europe, social distancing measures have been ratcheted up and the economy is expected to have a rough start to 2021. Most analysts expect recovery to resume around the middle of the year, but the level of uncertainty is high amid worries about whether new virus mutations will cause the third wave of infections and the slow start to Sweden's vaccination program due to delivery delays.

"In a scenario where the need for monetary policy support increases further, I consider it fully possible to cut the repo rate," Riksbank First Deputy Governor Cecilia Skingsley said. So far during the pandemic, the central bank has used its balance sheet to keep credit flowing in the economy.

Rate-setters have been wary about returning to negative interest rates - which were below zero between 2015 and 2019 - and have said that a cut would not be very effective, given the pandemic restrictions imposed by the government. Skingsley said it was tough to say what would be the trigger for a cut, "but a clear fall in inflation expectations - for instance, driven by a rapid and substantial appreciation of the krona exchange rate - would be a convincing factor for me to support a decision to cut the repo rate below zero again".

On Feb. 10, the central bank forecast no changes in the benchmark repo rate until at least the end of March 2024.