Riksbank postpones interest rate increases due to heightened uncertainty

Rate-setters in Sweden pushed back on market expectations for the start of policy normalisation given heightened uncertainty overseas, in part as a result of Brexit.

Indeed, the country´s monetary authority said it stood ready to implement further easing mesures should they be deemed necessary.

The Riskbank kept its main policy rate unchanged at -0.5%.

Slow increases in the repurchase rate were now not expected to occur until the second half of 2017, the monetary authority said.

As of 11:34 BST the US dollar was gaining 0.37% versus the krona.

"Economic activity in Sweden is continuing to strengthen, but there is considerable uncertainty over economic developments abroad and this has increased as a consequence of the result of the British referendum on the EU," the central bank said in a statement.

"There is still a high level of preparedness to make monetary policy more expansionary if this is needed to safeguard the inflation target," it added.

Swedish policy-makers reserved the right to act in between the regularly-scheduled policy meetings, adding that there was still room to push interest rates even further into negative territory and extend its programme of asset purchases.

They also warned they stood ready to intervene in foreign exchange markets if the currency, the krona, appreciated so quickly as to threaten the upturn in inflation.

Historically, the krona had weakened during bouts of uncertainty, analysts at Capital Economics pointed out.

Nonetheless, they suspected that this time around things might be different, taking the Riksbank by surprise, given the possibility of further easing by the European Central Bank and mounting risks in the euro area - possibly as a result of tensions in Italy´s financial system.

"If the Italian banking sector’s problems deteriorate further, then the krona could come under upward pressure due to safe-haven inflows, much like it did at the height of the euro-zone debt crisis in 2012.

"As a result, there is a strong chance that the Riksbank will need to intervene in the FX market, possibly later this year. Given the uncertainty surrounding the UK’s vote, for now we are sticking with our forecast for a rate rise in 2017, but we expect just one rise in the later stages of the year," Stephen Brown, European economist at Capital Economics said in a research report sent to clients.