Interest rates rise again

Sweden's central bank, the Riksbank, has raised interest rates by 0.25 percentage points to 2.75 percent.

Unusually, inflation is not playing a major part in the central bank’s deliberations. Instead, board members are seen to be keen to use the current economic growth as an opportunity to raise rates to levels they consider ‘normal’, i.e. 3.5-4.0 percent, irrespective of the benign inflation outlook.

Board members have stated on numerous occasions over the last 2 years that rates of around 2 percent are historically low and not sustainable.

Riksbank governor Stefan Ingves, in a prepared statement to the Riksdag’s finance committee, said that rising inflation was not an immediate concern.

“Due partly to falling energy prices, inflation is expected to remain somewhat lower than the target for the next two years. But after that, inflation will rise,” he said.

The bank raised its 2007 GDP growth forecast to 3.1 percent from 2.8 percent, it said in its latest quarterly inflation report.

For 2008 and 2009 it expects GDP growth of 2.7 percent and 2.2 percent respectively.

It said GDP growth in Sweden and abroad remained high during the first six months of this year and was stronger than anticipated.

“Growth is also expected to be relatively strong for the remainder of this year and during next year. However, the economy will gradually move into a calmer phase,” it added.

Consumer price inflation is expected to reach 2.2 percent in one year’s time, and 1.9 percent in two years, with the UND1X measure of underlying inflation seen at 1.5 percent in one and 1.7 percent in two years’ time.

The Riksbank bases its monetary policy on the UND1X, which excludes the interest rate portion of mortgages as well as changes in indirect taxes and subsidies.

It said that, over the coming years, UND1X inflation is expected to continue to rise as a result of increasing costs as economic activity improves.

“The fact that inflation is expected to be slightly below target two years ahead is partly due to energy prices temporarily muting the rate of price increase. When the restraining effect of the energy prices abates, inflation will rise,” it said.

It said there have been clear improvements in the Swedish labour market during the year and there are many indications that employment will continue to rise.

“Domestic cost pressure is expected to increase as productivity growth slackens and wages rise at a faster rate,” the Riksbank said.