Riksbank keeps repo rate at -0.50%, door open to cuts if needed

Policymakers in Sweden sounded a more confident note on the balance of risks but kept the door open to the possibility of fresh interest rate cuts, warning of the risk that inflation expectations might become unanchored or that the country's currency might strengthen too quickly.

On Tuesday, the country's central bank, the Riksbank, announced that its main policy lever, the repurchase rate, would be kept at -0.50%.

Riksbank also continued to expect the first hike in its repurchase rate would not arrive until mid-2018.

"The fact that inflation has recently been slightly higher than expected and that the risks of setbacks abroad are thought to have decreased makes it less likely than before that the Riksbank will cut the repo rate in the near term. This does not rule out repo rate cuts in the period ahead," policymakers said.

"Just as before, the Executive Board is prepared to implement further monetary policy easing if necessary to stabilise inflation and safeguard the inflation target. All of the tools that the Riksbank has described earlier can, as always, be used if necessary."

CPIF inflation had kept to a range of between 1.5% and 2.0% over the previous six months, the central bank pointed out, but added that the extended period below target meant inflation expectations might prove more sensitive to downside surprises.

Some analysts had expected officials would rule out further rate cuts, although in their policy statement rate-setters did say the odds were smaller than before.

"Monetary policy needs to be expansionary to safeguard the role of the inflation target as nominal anchor for price-setting and wage formation," the Riksbank added in a statement.

On the other hand, a policy of low interest rates carried potential risks with it, namely those linked to high and rising household indebtedness, the Riksbank said.

However, those should be addressed through targeted measures including housing, taxation and macroprudential policy.

Worth noting, Riksbank downgraded its 2017 GDP forecast for Sweden from 2.8% to 2.2%.

As of 0935 BST the US dollar was 0.40% higher against the Krona to 8.5241.