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FINANCE

Riksbank raises rates

Sweden’s Riksbank has raised its benchmark interest rate by 0.25 percent.

Riksbank raises rates

The repo rate now stands at 4.75 percent, and the bank saying it will likely remain there for the remainder of the year.

Fears over Sweden’s rising inflation seemed to be the primary reason for the rate hike, which “is necessary to prevent the high inflation from becoming entrenched”, according to the Riksbank’s Executive Board.

The Riksbank expects the higher interest rate to bring Sweden’s inflation rate down to its 2 percent target within a couple of years.

The bank blamed Sweden’s higher inflation, now at levels not seen since the 1990s, on rising food and energy prices.

Despite recent drops in the price for oil and food, the Riksbank feels that inflation expectations, while decreasing, remain too high.

The bank also acknowledged that Sweden’s economy is slowing, something that caused many analysts to believe the Riksbank would leave the repo rate unchanged at 4.5 percent.

Ahead of Wednesday’s meeting of the board of governors, analysts were evenly split as to whether the Riksbank would actually raise rates.

“Growth has declined more than anticipated, both in Sweden and abroad,” said the bank in a statement.

“Economic activity will continue to slow down and the labour market situation will slacken. The Riksbank’s assessment is that resource utilization… is still slightly higher than normal but will fall during the forecast period.”

While the bank doesn’t expect any further changes to the repo rate before the end of the year, it did leave the door open to a possible changes, depending on developments in the global economy.

“The repo rate may, for instance, be higher if cost pressures are higher than expected. However, if the economic developments in Sweden and abroad continue to be weaker than expected, the interest rate may instead need to be lower,” it said.

ECONOMY

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

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

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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