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Swedish central bank could be open for rates cut

Thursday, 10 November 2011
Despite the growing debt crisis and financial turmoil, the Swedish banks so far have no problems in obtaining funding, according to the Governor of the Swedish central bank (Riksbank) Stefan Ingves in a speech on Monday to the Standing Committee.

But if the debt crisis from the external sources gets worse, the Riksbank will lower the policy rate.
"In that case, monetary policy in Sweden to be more expansive in order to mitigate the effects of the deepening crisis," he said according to various Swedish press reports.

Besides the risk of a worsening situation in Europe, Ingves has also raised the danger of stagflation. Despite the weak world economic growth and business activities, inflation is surprisingly high in the world.

"There is therefore a risk of developing an environment characterized by economic stagnation and high inflation, so-called stagflation."


When central banks are faced with difficult trade-off problems such as to meet the high inflation required a higher interest rate is passed. This will in turn suppress the already low growth. A high inflationary environment can be imported into Sweden, according to the views of Ingves.
"This requires a higher Swedish repo rate to keep inflation around the target."

During the questioning, the governor was questioned especially regarding the fact that the Swedish repo rate was really high and if it should be lowered to meet a coming recession and to maintain investment. Ingves said that the rate that the Riksbank has decided now is the right one and that the bank in moving in the right direction.

“The interest rate is 2 percent, it is the rate of interest that will leads to a good socio-economic development,” said Ingves.

According to Stefan Ingves, it has become much more difficult to assess developments in the money market, not least due to the "extremely high interest kickback" which hit various countries' government securities.
Therefore on the who the central bank governor believe that they will be watching the situation nicely and close ands would act on interest rates when it become very necessary.

It should be noted that one of the biggest deterrents to quick downward movement of interest rate in Sweden is the nature of its real estate market.  Although prices of commodities might have edged down a bit, Swedish house prices continue to remain astronomically high – though other reports suggest that activities in the house market here have stabilised.

But the house prices remaining high means that changes in interest rate would just keep on pushing the prices up and this could lead to a toxic bubble that might explode in the future and bring the economy to its knee.
Had the house price organically started falling to an acceptable level, then the governor would quickly and easily sanction a drop in interest rates.
By Team

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