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INTEREST RATES

Ingves gives support to rate hold

The governor of Sweden's central bank, the Riksbank, Stefan Ingves, has endorsed the decision to leave the bank's repo rate unchanged last month.

Ingves gives support to rate hold

The governor was unable to attend the April 19 monetary policy meeting of the executive board due to the volcanic ash cloud affecting flights after attending a meeting of EU finance ministers in Madrid.

“It was appropriate to leave the repo rate unchanged at 0.25 per cent at the latest monetary policy meeting in April,” Ingves wrote in a commentary published on Monday in the meeting’s minutes. “I also believe that the forecast for the repo rate was reasonable.”

He added, “I support the analysis in the Monetary Policy Update and the conclusions drawn concerning economic developments, the repo-rate decision and the repo-rate path. Against this general background, I will add a few comments here, but these do not change the conclusions in the Update.”

Ingves expects a return to global growth at a “good” level, which should lift the segments that are important to Sweden in global trade. However, he pointed out that Swedish economic policy must confront imbalanced global growth because the world is divided.

“Growth in Asia and South America is rapid, while the recovery is moving more slowly in the USA and Europe,” he wrote. “This will entail a prolonged recovery in Sweden as Swedish exports to the EU are substantial.”

Ingves noted that the outcome of the Greek financial crisis is uncertain, but Sweden will likely not be affected.

“This should not have any significant impact on Swedish monetary policy,” wrote Ingves. “Swedish banks have a very limited exposure to the Greek market and any market effects will probably be indirect.”

The governor also pointed out that conflicting forces are pulling the Swedish economy in different directions, with a strong service sector and an industrial sector experiencing a substantial fall in export demand.

“This makes it more difficult to analyse the situation, but I share the assessment, which we have also made earlier, that we are moving towards a sustainable economic recovery at the same time as inflation is moderate with well-anchored inflation expectations,” he wrote.

Ingves added Sweden has had extremely low interest rates for “a rather long time.”

“The financial markets are now more stable and the recovery of the Swedish economy is continuing,” he wrote. “I therefore think that the time is right to gradually phase out the special loans that the Riksbank has offered. It is appropriate to shorten the maturity of the loans offered at a variable rate and the fixed-rate loans will soon fall due.”

The governor said he does not believe the withdrawal of the Riksbank’s stimulus incentives will be particularly dramatic.

“If [the Financial Supervisory Authority] introduces restrictions regarding leverage levels for mortgages, this will also de facto have a tightening effect,” he wrote. “This is a reasonable measure from the consumer protection point of view, but also given the division we can now see on the credit market with a limited demand for loans in the corporate sector and a high demand for loans in the household sector.”

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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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