Riksbank signals inflation warning

The central bank has warned that the current labour shortage in Sweden could soon have an inflationary effect.

Published: 14 August 2007 16:10 CEST

“If the labour shortage worsens companies may be forced to pay higher wages than was recommended in the financial policy report,” said Barbro-Wickman Parak, vice chairman of the Riksbank.

She also noted that the national accounts for the second quarter signalled a drop-off in productivity.

As for the recent financial unrest and liquidity problems on the international financial markets, however, Wickman-Parak was optimistic.

“There are currently no liquidity problems on the Swedish financial market. The market is working well,” she said.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said.

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014.

In the press release, the bank warned that the rate would continue to increase further in the coming years.

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said.

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years.

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases.

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote.

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”.

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.”

She said people in Sweden should be prepared for rates to rise even further.

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”

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