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Sweden’s Riksbank steered clear of signaling any post-pandemic tightening, as it remains unconvinced that a recent surge in inflation will last.

The central bank forecast that its repo rate will remain at zero through the third quarter of 2024, which would mean a full decade of keeping its benchmark rate at zero or lower. The bank’s new forecast for inflation indicates that price increases will peak above 3% -- clearly above its 2%-target -- in the coming months, before slowing down.

Riksbank has been one of the more dovish central banks among the G-10 holders of most traded currencies, in contrast to neighboring Norway, which is poised to raise rates this week. While all economists surveyed by Bloomberg expected the Riksbank to leave the benchmark rate at zero, there was some speculation that it would send a cautious signal of a rate hike on the horizon. 

Instead, the rate path remains “stone-dead,” SEB economist Robert Bergqvist said on Twitter. “It feels rather surreal, as the world is preparing for a monetary policy normalization.” 

The bank, which has started to scale back the asset purchases it used to support Sweden’s economy during the pandemic, also said it still plans to keep the size of its balance sheet largely unchanged next year. 

“The expansionary monetary policy contributes to strengthening economic activity and is thus a prerequisite for inflation to be lastingly close to the target of 2% even in the longer term,” the Riksbank said in a statement. 

Welcoming Inflation

Higher than expected price increases in recent months, though mainly driven by energy prices, have provided some relief to the central bank, which held rates below zero for almost five years to push inflation toward its target. The bank said it would welcome price increases above 2% for a time, as a higher rate would help to “more clearly anchor price and wage expectations in a way that is compatible” with inflation close to the target. 

“The risks with reducing stimulation measures too early are therefore still judged to be greater than the risks of retaining them too long,” the Riksbank said. 

An expansive fiscal policy hasn’t made the central bank more comfortable about lifting its foot from the accelerator. On Monday, Sweden’s Finance Minister Magdalena Andersson announced a budget proposal that comprises 74 billion Swedish kronor ($8.5 billion) worth of spending on reforms, aiming for a budget gap of 0.7% of gross domestic product next year. 

Sweden’s economy has fared better than most rich peers’ during the pandemic, helped by generous welfare systems and widespread digitalization that made working from home less of a disruption. More recently, supply chain disruptions have idled plants, pushing prices higher and casting some doubt about the recovery in the export-dependent nation.

“Rising global demand and transport problems have led to consumer prices increasing at a fast pace in several areas,” the Riksbank said. “However, the price upturns are assessed to be largely temporary. When growth enters a calmer phase, the bottlenecks are expected to resolve and inflation to slow down.”

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