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Riksbank raises base rate to 0.75 percent

TT/The Local · 2 Sep 2010, 09:32

Published: 02 Sep 2010 09:32 GMT+02:00

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Sweden's economy is continuing to show good strength, several recent reports have indicated, with low inflationary pressures which are expected to increase as the economy continues to rebound.

The rate was thus raised in order to attain the inflation target of 2 percent in the longer term, although analysts questioned whether the current low crisis rates were becoming indicative of more normal recession level rates.

"The interest rate should be hiked from today's crisis rates to a more normal recession level rate," said Elisabet Kopelman, an SEB analyst said ahead of the decision.

The decision is likely to impact on variable mortgage interest rates, which have begun to climb from record low levels in recent months in anticipation of the Riksbank decision.

The Riksbank last raised the repo rate in June from 0.25 to 0.5 percent, the first climb since shortly before the finance crisis broke out with the collapse of US investment bank Lehman Brothers in September 2008.

The bank's monetary policy update in June, which indicated an easing of the repo rate path to indicate that rates would rise at a slower pace than previously indicated, remains unchanged.

Riksbank governor Stefan Ingves has previously warned households to expect variable mortgage rates of around 6 percent in a couple of years.

Deputy governor Lars E O Svensson entered a reservation against the decision to raise the repo rate to 0.75 percent, and against the repo rate path in the current monetary policy update. Deputy governor Karolina Ekholm entered a reservation against the repo rate path.

Svensson would have preferred to see the rate remain at 0.5 percent, with the rates peaking at 1.75 percent by the end of 2011, while Ekholm preferred a flatter rate path culminating around a percent lower than currently project in the monetary policy update.

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Ekholm argued that weaker development overseas could be expected to impact in growth and inflation in Sweden.

Inflation, measured with the consumer price index, is projected to amount to 1.1 percent in 2010, rising to 1.9 percent in 2011 and 2.5 percent in 2012.

Repo rates are projected to climb to 0.9 in the fourth quarter, to 1.9 percent by the end of 2011 and to an average of 3 percent in 2012.

TT/The Local (news@thelocal.se)

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Your comments about this article

10:08 September 2, 2010 by planet.sweden
Sweden's Historic Blunder

Watching Sweden's monetary policy over the last 2 years has been a jaw dropping experience.

Rates have been slashed to the bone, in theory to stave off the effects of a recession. The problem is the Swedish economy is not driven by domestic demand, its driven by exports. As such dropping interest rates for home buyers creates precious few jobs in Sweden, but it does fuel house price inflation.

This is exactly what has happened. Stockholm home owners have seen the value of their assets soar by some 15 pct in the last year year, a remarkable and wholly unsustainable level for a Western city in a mature economy, particularly in what is (if you follow the Riksbank's logic, a recession).

Thus Sweden in 2 reckless years has managed to create what its spent the previous 70 years trying to avoid. Namely a segregated society of winners (property owners) and losers (those locked outside property ownership and subject to the whims of a dysfunctional rental market).

But in the end everyone will lose. Sweden has simply replicated the errors the US made in the last decade. As The Economist noted recently, Sweden is the only Western country not to have experienced a significant house price correction in the last decade. When it comes its likely to be , and the Riksbank will be wholly to blame for the fall out.
12:21 September 2, 2010 by Swedesmith

Very interesting commentary. Strange how our (mis)leaders are handling our economy. Are they that misinformed or is there an ulterior motive???
13:01 September 2, 2010 by Tiddler
The population (of the Western world) is right where their owners want them, and that is in debt for perpetuity, having, in the main, lost the means of self sufficiency and local trade.

We have entered a "post democratic era", or economic fascism (merger of state and corporate interests), and this is taking us all along the road to serfdom.

The future is not bright, I am most unhappy to say. It will get better, but only after it has become a whole lot worse.
13:26 September 2, 2010 by isenhand
Looks like we have a government setting us up for a nasty crash!

With the alliance about to win the election I suspect we have worse to come.

Have a look at "Overdose: The Next Financial Crisis" on YouTube.
13:56 September 2, 2010 by planethero
bloody nora, intelligent interesting commentary (not from nutters) on the local shock! expensive property = mortgage slavery = crap lives, wheres olaf palme when you need him.
15:45 September 2, 2010 by Mib
The Swedish property market is very cheap compared to other countries. So, hence the rises this year, albeit from a drop during the depths of the credit crunch. In terms of a equal society, one of the main reasons to BUY in places like Stockholm is because it is very difficult to RENT anything if you follow the rules. So, you either pay a 6 figure bribe on the black market to get a frist time contract and hope no-one finds out or you buy a place or the Goverment goes on a spending spree to build affordable housing and that is not going to happen. Whoever gets in should focus on spendning money on creating jobs by reducing employer's tax for employees, especially for the young people.

In terms of the currency and rates, the Euro became very strong against most currencies and this is the main export market fo Sweden.So had they not slashed rates, their exports would have been more expensive....however...the export market was dying regardless as everyone was suffering. So, in which case you have to rely on the internal market to at least try to minimise the damage from less exports. You can't just sit there and act as if nothing is happening outside Sweden!

Considering what was happening......at a very fast pace....the Swedish economy has survived better than most countries with he help of the banking regulations brought in when Sweden had its own credit crunch in the eraly nineties.
20:13 September 2, 2010 by Brucelee@stockholm.sweden
@ planet.sweden, your comments are really insight.

When I look back at what Riskbank did during the crisis, I found it performs worst than Fredrik Reinfeldt's goverment, especially treasury minister, Anders Borg.

Stefan Ingves seems like a retiring professor who looks only at past figures, no prediction sight at all. He drop the repo rate too late when crisis came, and now rise it too early when things just start to get better.
22:55 September 2, 2010 by McChatter
Look at the interest rates: Sweden 0,75%, Euro-countries 1,00%

We're still talking peanuts.

Ingves has, as Riksbank president, the task to defend the Swedish krona. He has proved himself the last two-three years to be alienated from the present events. As a professional investor I cannot take his comments seriously. Who on earth can predict interest rates in 2014 under the present circumstances?

Of course, there is a major difference between house prices and inflation. House prices, particularly in the Stockholm region, are driven up by a shortage of housing. This has been so since at least 1945. That's why we have "bostadsrätter". This is a domestic issue.

Inflation is international. The present Swedish government has been prudent, not taken any irrational moves (Saab, Volvo), and has concentrated on expanding domestic growth. Today, Sweden is beginning to profit from these policies. Although the unemployment percentage has increased, (where did they come from? F-kassan?) Sweden is much better placed than many other European countries to face the coming testing years. The double-dip is no longer a pipe-dream.

And that's the mistake that Ingves can't see. He can't see the two entities apart: house prices versus inflation caused externally. That's why his forecasts are useless.

Pity that the Socialists have adopted right-wing policies. Now there's no choice. Still, I will still bet on a strong Swedish krona.
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