Sweden's Riksbank raises interest rate

Sweden's Riksbank raised its most important interest rate, the repo rate, by 0.25 percentage points to 2% on Thursday.

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The decision was made at Wednesday's financial policy meeting.

"The forecasts described in the Inflation Report indicate low inflationary pressure and that it might be possible to increase the repo rate at a slightly slower rate in future, compared with the interest rate path on which the forecasts are based," wrote the Riksbank in a statement.

The bank also said that market expectations of future interest rate increases have also been adjusted downwards somewhat over the past few days.

"The rise was entirely expected. They had signalled that it would happen so it was no great surprise," said Peter Kaplan, chief analyst at Handelsbanken, to TT.

"On the other hand you could say that it's a big step from what you normally do when inflation is this low. Normally when inflation is at this low level - and, what's more, has surprisingly fallen - you reduce interest rates."

But the rise was prompted by strong growth and continued increases in the level of employment, said Kaplan, who added that the Riksbank would probably be cautious with future increases.

"For households the effect will be limited. The fixed interest rates really won't be affected," said Robert Bergqvist, chief analyst at SEB Merchant Banking.

He added that the Riksbank was a little softer in its view of inflationary pressure than it had been before.

"Despite the fact that Swedish market conditions are developing in a positive and strong way, no great inflationary pressure is being generated and that means that the Riksbank has considerable freedom to respond with interest rates how it wants," he told TT.

"It doesn't look like it will be house prices which determine the interest rate path in future - rather, it will be inflationary pressure. Households can count on continued low interest rates."

The Riksbank reported that GDP growth in Sweden amounted to more than 3 per cent during the third quarter of 2005, compared with the corresponding period in 2004.

"Most indications are that the economy continued to expand at a rapid rate also at the end of 2005. Over the coming years, household consumption is expected to grow at a slightly more rapid rate than was forecast in the December Inflation Report, as the labour market situation is expected to improve and income to increase," wrote the bank.

Corporate investment and exports are also expected to continue to rise at a relatively rapid rate.

The last decade's increasing productivity appears to have continued in 2005, noted the Riksbank.

"All in all, there is reason to expect slightly higher average GDP growth in the Swedish economy than was anticipated in the earlier assessment."

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