Economic recovery could bring quick rate hikes: Riksbank

Sweden’s central bank could raise interest rates quickly to combat inflation associated with an economic recovery in Sweden, Riksbank chief Stefan Ingves warned on Wednesday.

Economic recovery could bring quick rate hikes: Riksbank

“If the global economy recovers more quickly than we are predicting, this will also contribute to making monetary policy less expansionary,” Ingves said in a speech given at the Avanza Bank.

But before the Riksbank starts raising rates again, which won’t happen until 2010 according to the bank’s latest forecast, Ingves said he is open for even further cuts in the repo rate, Sweden’s benchmark interest rate.

“What the Riksbank must consider further ahead is whether economic developments require further interest rate cuts and whether the current monetary policy then needs to be supported by more unconventional methods. We must be prepared to be able to implement an alternative monetary policy if developments should so require,” said Ingves.

One option to an additional lowering of the repo rate, which currently stands at 0.5 percent, is to send signals that today’s lower interest rates will remain in place for an extended period of time.

“We can, for instance, announce that we are going to hold a low repo rate for a longer period than we assumed at the monetary policy meeting in April and show how the inflation path will then approach 2 per cent more quickly than otherwise. This would raise inflation expectations,” he explained.

The Riksbank governor added that he has seen certain signs of positive economic developments in recent months, mostly from the United States.

“It is as yet too early to talk of a stabilization in the US economy, particularly given that the labour market is continuing to weaken rapidly. However, there are signs that the rate of the downturn may be slackening,” said Ingves.

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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.”