Riksbank off base with finance crunch rate hikes

The Swedish Riksbank has concluded that while everyone failed to see the impending finance crunch, it's own board was furthest behind.

The Riksbank has conducted its own forecasts for the development of the interest rate since 2009 but has been further off the mark than other market assessors, the new report shows.

“On average over the three years (2007-2009) all market assessors had a tendency to exaggerate the repo rate, but the Riksbank had the worst analysis of all five forecasters,” the Riksbank wrote in its own analysis report published on Monday.

Riksbank chief Stefan Ingves had to withstand a wave of criticism after hiking the bank’s main base (repo) rate in September 2008, just weeks before the collapse of Lehman Brothers which sparked the deepest recession since the 1930s depression.

The bank has now concluded that its own analysis is regularly after the curve. The report states that the worst errors were made in July and September 2008 with significantly over-optimistic inflation forecasts. These erroneous forecasts laid the basis for the interest rate rises in July and September.

The other market assessors compared in the study were The National Institute of Economic Research (Konjunturinstitutet – KI), the Ministry of Finance, SEB and Swedbank.

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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.”