April 27, 2017 / 8:29 AM / 3 months ago

UPDATE 2-Swedish central bank surprisingly dovish, extends bond purchases and hold rates

4 Min Read

* Benchmark repo rate held at -0.50 pct as expected

* QE extended by 15 bln SEK into H2 2017

* First rate hike postponed, now seen in mid-2018 (Adds analyst comment, detail, background)

By Simon Johnson and Johan Ahlander

STOCKHOLM, April 27 (Reuters) - In a surprise move, Sweden's central bank extended its bond buying programme on Thursday and slightly delayed future rate hikes despite strong domestic growth and cautious optimism about global economy activity.

The Riksbank kept its benchmark interest rate at an unprecedented -0.50 percent, as expected, but slightly pushed out its forecast for when rates may rise to the middle of 2018, hoping to underpin an uncertain pick-up in inflation.

"Inflation has shown a rising trend for some years, but it is now expected to take longer before it stabilises around 2 percent," the bank said in a statement.

The six-person policymaking board was split down the middle over whether to add more stimulus, and governor Stefan Ingves had to cast a deciding vote in favour of a 15 billion crown increase in bond purchases.

"This has definitely taken the market by surprise and has led us to push back our own forecast of a first rate hike," said Stephen Brown, economist at Capital Economics.

"I think this will lead the economy to a stronger momentum which means when the Riksbank do start raising rates, they will have to do that at a faster pace in order to bring back the economy to normal."

The Swedish crown weakened sharply on the decision.

Earlier on Thursday, the Bank of Japan sounded a bullish note as it held rates unchanged, though it trimmed its inflation forecast, implying it will remain dovish ahead.

The ECB is also expected to strike an upbeat note later on Thursday as it keeps policy on hold.

Emmanuel Macron's strong showing in the first round of the French election has eased some uncertainty in Europe and should the centrist win the second round in May, analysts see an increased chance the ECB will hike rates early next year.

All three central banks are balancing a stronger outlook with geopolitical worries and inflation that remains too low.

While Europe and Japan are in the early stages of recovery, Sweden's economy has been growing robustly for the last three years and the Riksbank's position appears ultra-loose and at odds with an economy that it sees growing 2.8 percent this year.

Still, a protectionist leaning U.S. President, Brexit and elections in Germany later this year has given the Riksbank cause for caution.

In addition, centrally agreed wage rises have come in below its forecast and the effects of a weaker crown last year will fade, as will higher energy prices, all factors arguing for inflation to remain subdued despite surging economic growth.

"The Riksbank is surprisingly dovish," said Jorgen Kennemar, economist at Swedbank.

"It has clearly been influenced by the recent low wage deals and by the fact that the underlying price pressure in the economy is still very subdued."

Inflation hit the Riksbank's 2 percent target for the first time in years in February, but has slipped back again and the central bank is worried that price pressure remains weak despite ultra-loose policy and strong growth.

Analysts in a Reuters poll had been unanimous in seeing no change to benchmark rates, but most had expected the central bank to wind up its bond purchases in June, as it had previously announced. ($1 = 8.8100 Swedish crowns)

Reporting by Johan Ahlander, Simon Johnson and Johan Sennero; Editing by Niklas Pollard and Toby Chopra

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