Swedish banks: Interest rates set to rise

Two of Sweden's biggest banks, SEB and Nordea, have predicted that the Riksbank will raise its benchmark interest rate to 2 percent by the end of next year from its current level of 0.25 percent.

• Nordea closes out 2011 by beating forecasts (24 Jan 12)
• Ingves: Interest rates stable all year (2 Jan 12)
• Sweden to meet England in Euro 2012 (2 Dec 11)

SEB bank has predicted the rate to reach 2 percent by the end of 2010 and 3 percent the following year.

SEB's new economic forecast also sees a turnaround in fortunes for Sweden's GDP, which it expects to plummet by 5 percent this year only to grow by 2 percent next year and a further 2.6 percent in 2011.

Unemployment is set to rise from 8.4 percent this year to 10.5 percent in 2010 and 10.7 percent in 2011.

"Last winter's drama was of historic proportions, but it has also been met by crisis policies of historic proportions," said SEB chief economist Robert Bergqvist.

"Also, the effect of the crisis policies has been stronger than we expected. So the situation is looking better than it did three months ago," he added.

SEB expects unemployment to reach its peak in autumn of next year, meaning that this winter's collective bargaining process will be carried out in a difficult period. SEB beleives this will lead to very low wage increases.

"We expect these to be the lowest agreements since the 1990s, with wage increase under 2 percent," said Bergqvist.

Nordea bank's latest prognosis also sees the Swedish economy gathering pace in the second half of this year.

"The picture we envisioned in the spring, with a recovery predicted in the autumn, has been confirmed by incoming statistics," said Nordea chief economist Annika Winsth.

Nordea expects Sweden's GDP to drop by 4.2 percent this year before rising by 2.8 percent next year and 2 percent in 2011.

Nordea predicts that unemployment will increase from 8.6 percent this year to 10.2 percent next year before falling back to 9.9 percent in 2011.

SEB and Nordea both expect the Riksbank to begin raising its benchmark interest rate in April next year. The rate currently rests at 0.25 percent.

"We don't see any inflation risk but we still expect the Riksbank to raise the interest rate by half a percentage point at the beginning of April," said Winsth.

While the Riksbank has intimated that the rate could remain extremely low for some time to come, Nordea believes that the central bank now has good cause to revise its prognosis.

Nordea also predicts a strengthening of the krona, with a rate of 9.40 kronor to the euro expected within the next twelve months.