Riksbank mulls summer interest rate hike

Riksbank mulls summer interest rate hike
Riksbank chief Stefan Ingves
The Swedish Riksbank on Thursday announced its decision to leave the benchmark interest (repo) rate unchanged at 0.25 percent.

The bank’s executive board assessed that rates will be raised slightly early than forecast in December, with the first hikes coming in the “summer or early autumn.”

“The assessment now is that the upturn in economic activity rests on more solid ground and that there are therefore sound reasons for increasing the repo rate somewhat sooner than was assessed in December,” the Riksbank said in a statement.

The bank’s board argued that Sweden’s economic recovery has become more “distinct” on the back of a slight recent increase in international growth.

The picture of the recovery remains divided, the bank wrote, with the manufacturing industry lagging behind the economy as a whole.

“When economic activity abroad picks up, the assessment is that the demand for Swedish products will increase and exports will rise.”

The Riksbank expects Swedish GDP growth to increase in the period ahead “but it will take some time before the economy recovers from the severe downturn in connection with the crisis.”

The bank forecast that while the labour market can be expected to continue to weaken for a while, unemployment is unlikely to be as high as first feared.

“All in all, this means that the risk of a major setback in the recovery of the economy has declined and that the upturn therefore rests on more solid ground.”

While inflation remains below the stated two percent target there is a need to keep interests low, the bank explained. But with more signs filtering through of a normalization of the financial markets the need to adjust monetary policy may arrive somewhat sooner than the bank’s previous assessment in December.

The rate hikes are expected to come more gradually, the bank said in a revised forecast. The long term forecast for the benchmark repo rate has however been adjusted downwards slightly.

Riksbank expects inflation to be 1.6 percent in 2010, climbing to 2.9 percent in 2011 and 3.1 percent in 2012. Repo rates will rise from the current low of 0.25 percent to 1.1 percent by the fist quarter 2011 and 2.8 percent at the start of 2012.

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