Sweden's central bank on Wednesday decided to delay an increase in its repo rate until the second half of 2014 as weak demand and a strong krona continued to stifle inflation, which is now well below the bank's 2 percent target.

The benchmark repo rate was maintained at 1 percent as expected, but the Executive Board of the Riksbank said it is making a downward adjustment to its future interest rate path. The bank said gradual increases in the repo rate are not expected to begin until the second half of 2014, which is around a year later than the earlier forecast.

The board now expects inflation to take more time to reach the 2 percent target than earlier thought. Price growth remained very low at present due to weak demand in the economy, appreciation of the currency and low price mark-ups by companies.

Deputy Governors Karolina Ekholm and Lars Svensson entered reservations against the decision to maintain the repo rate unchanged at its current level and against the repo-rate path in the Monetary Policy Update.

While Ekholm advocated lowering of the repo rate to 0.75 percent, Svensson favored a 50 basis point reduction in the rate to 0.5 percent.

The Executive Board acknowledged that developments in the euro area are a source of uncertainty, as are developments in the exchange rate and the companies' possibility to pass on costs to consumers.

Meanwhile, the central bank lowered its inflation forecast, but slightly lifted the economy's growth outlook.

The Riksbank now expects inflation to be 0.1 percent this year, weaker than February's forecast of 0.4 percent. In 2014, inflation is projected to rise to 1.4 percent, but still below the previously expected 2.1 percent.

While the headline inflation is forecast to reach 2.7 percent in 2015, the core inflation is expected to rise to 2 percent.

Gross domestic product is forecast to grow 1.4 percent this year, slightly faster than 1.2 percent forecast in February. For 2014, the GDP outlook was maintained at 2.7 percent. The forecast for 2015 was lifted to 3.5 percent from 3.1 percent previously projected.

Justifying its decision to refrain from lowering the rate further despite low inflation and weak economy, the Board said "an even lower repo rate today would further increase the risk of imbalances building up." The last policy change was in December when the rate was cut by 25 basis points to the current level.

Earlier this week, the Finance Ministry lowered Sweden's growth forecast for 2014 saying the economy is likely to remain subdued over this year amid rising unemployment.

The finance ministry now expects GDP to grow 2.2 percent next year and 3.6 percent in 2015. Growth is seen at 1.2 percent this year, slightly faster than previously estimated.

The International Monetary Fund yesterday forecast 1 percent growth for Sweden this year and 2.2 percent next year.

RTTNews