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The Riksbank said it could still cut rates below zero after its meeting on Tuesday, as forecasts showed inflation undershooting its target throughout its three-year forecast period.
While the economic outlook has brightened, inflationary pressures remained low and policy needed to remain expansionary, the Riksbank said, leaving policy on hold and projecting that its key rate would remain at 0% until at least 2024 with inflation failing to rise to 2.0%.
"It is entirely possible that the repo rate may be cut, particularly if confidence in the inflation target were under threat," according to the Riksbank's quarterly Monetary Policy Report.
"Several factors that currently are difficult to assess will determine whether it is appropriate to cut the repo rate to negative levels again," namely the exchange rate, the recovery of the supply side and how a negative rate would be expected to impact interest rates across the board, the MPR went on.
The broad outlines of the Riksbank's asset purchases programme were unaltered with the total package capped at SEK700 billion and with purchases set to be completed by the end of this year.
No near-term unwind of quantitative easing is in sight, with holdings to "be maintained at least until the end of 2022."
OVERALL GROWTH OUTLOOK LITTLE CHANGED
The central bank pushed up its growth forecast for 2021 to 3.7% from 3.0%, but nudged down its 2022 forecast to 3.6% from 3.9% and lowered its 2023 forecast to 2.0% from 2.4%, leaving overall growth over the entire period little changed.
CPIF inflation was never shown reaching target on a calendar-year basis. After coming in at 0.5% in 2020 it was forecast to be 1.5% this year, 1.4% in 2022 and 1.7% in 2023, with the 2021 and 2023 forecasts unchanged and 2022 up just 0.1 percentage point.
Some board members, most recently Anna Breman, have floated the idea of taking the repo rate negative down the line to support the recovery once the economy is fully reopened.
The Riksbank's policy stance is not symmetrical. If inflation were to overshoot target, the board is not inclined to tilt to a hike at present, as members believe that the overshoot could help restore belief in the 2% target after the prolonged undershoot.
"A scenario where inflation rises more quickly during the forecast period need not be a reason to make monetary policy less expansionary in different ways. If inflation were to overshoot the target, this could help to anchor inflation expectations more firmly around 2%, which would be good for price-setting and wage formation," the MPR said.