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Swedish central bank holds policy, primes guns for December action

Reuters
The sign for Sweden's central bank is pictured in Stockholm, Sweden, August 12, 2016. Picture taken August 12, 2016. REUTERS/Violette Goarant

STOCKHOLM (Reuters) - Sweden's central bank kept ultra-low rates and its bond purchase programme unchanged on Thursday, but said a recent slowdown in inflation meant the chance of a rate cut had risen and it was ready to expand quantitative easing at its next meeting in December.

The Riksbank has slashed rates to -0.50 basis points and is on track to buy 40 percent of the stock of outstanding government bonds by year end, but inflation remains subdued, with the Riksbank saying it would take longer to hit its 2 percent target than previously expected.

"The Executive Board assesses that the repo rate needs to be held at −0.50 per cent for six months longer than was forecast in September," the central bank said in a statement.

"The probability that the rate will be cut further has increased."

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In addition, the Riksbank said it was prepared to extend its quantitative easing programme at its next meeting in December.

The Swedish crown weakened after the decision. (EURSEK=D4)

Ultra-loose policy has pushed up inflation, but the Riksbank got a cold shower in September when prices came in well below both market and its own forecasts.

With the Swedish crown trading around 6-year lows against the euro and the ECB holding policy unchanged at its most recent meeting, the Riksbank has been able to hold fire.

But analysts believe it will be forced to take more action before year end.

More easing by the ECB would probably trigger a response from the Riksbank.

That is likely after ECB President Mario Draghi said there were no signs yet of a convincing upward trend in underlying inflation and shot down any talk of tapering its 1.7 trillion euro asset-buying programme.

The Bank of England is also seen easing policy further, though not until early 2017.

The Riksbank said it still had "a high level of preparedness to make monetary policy even more expansionary if the upward trend in inflation were to be threatened".

(Reporting by Stockholm Newsroom; Editing by Alistair Scrutton)