Riksbank offers support to Estonian central bank

Sweden’s central bank announced on Friday it was entering into a “precautionary arrangement” with its Estonian counterpart should the Baltic country’s battered financial system need assistance.

Riksbank offers support to Estonian central bank

In a joint statement, the banks said their “precautionary arrangement to secure financial stability and to promote confidence on the financial markets” would allow the Estonians to borrow up to 10 billion kronor ($ 1.12 billion).

“The agreement increases the capability of Estonia’s central bank to secure financial stability,” its chief Andres Lipstok told reporters.

“The agreement is a sign of the importance of cross-border cooperation in the current world where financial markets are so integrated,” he said.

Central bank spokeswoman Livia Kulm cautioned that the deal “is in no way a sign that things have got worse in Estonian banking.”

Estonian authorities have repeatedly insisted that they will not have to follow the lead of neighbouring recession-casualty Latvia, where the government in November took over the nation’s second-biggest bank, Parex, after a depositors fled.

Sweden is heavily exposed to the economic crisis in Estonia and fellow Baltic states Latvia and Lithuania because its banks dominate their markets and its companies are among the region’s top investors.

“It is important that central banks cooperate and assist each other in times of financial stress. The financial systems in Estonia and Sweden are closely linked,” the governor of Sweden’s central bank, Stefan Ingves, said in a statement.

A Soviet-ruled state which regained independence from Moscow in 1991, Estonia long enjoyed a reputation as a “Tiger” in the European Union, which it joined in 2004, with growth rates of 10.4 percent in 2006 and 6.3 percent in 2007.

But it tipped into recession last year in the face of double-digit inflation and tighter credit rules, as well as the global crisis which hit exports of goods and services.

Output shrank 3.6 percent in 2008 and is expected to fall by up to 8.9 percent this year.


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.”