Sweden raises interest rate by 0.25 percent

Sweden’s Riksbank raised the country’s benchmark repo rate by 0.25 percent on Tuesday, bringing the interest rate up to 1.0 percent.

Sweden raises interest rate by 0.25 percent

“The Swedish economy is growing rapidly. Inflationary pressures are low, but are expected to increase as economic activity strengthens,” the Riksbank said in a statement.

The Riksbank added, however, that it doesn’t expect to raise rates much “in the coming years” due to “weak developments overseas”.

The move marks the third consecutive boost for Sweden’s benchmark interest rate, bringing it back to a level not seen since April 2009 when the Riksbank halved rates from 1 percent to 0.5 percent.

In explaining its decision to raise rates by a quarter-point, the Riksbank said that Sweden’s economy is “developing well”, displaying positive signs in terms of public finances, household savings, and consumption. Employment has also picked up rapidly as a result, according to the Riksbank.

But the Riksbank also argued that economic uncertainty abroad needed to be taken into account.

“The recovery will take time in the United States, while the major fiscal policy tightening measures in several European countries are dampening growth in Europe. The slow recovery of these countries is leading to moderate inflationary pressures and low international interest rates,” said the bank.

Questions about the pace of economic recovery overseas also led the Riksbank to lower its forecast for how Sweden’s repo rate may be adjusted in the future.

“All in all, developments abroad, together with the low inflationary pressures prevailing in Sweden during the forecast period, argue against the need to raise the repo rate as rapidly in the coming years,” said the Riksbank.

The Riksbank now projects the repo rate to reach 1.3 percent in the first quarter of 2011, compared with a previous forecast of 1.4 percent.

By the final quarter of 2011, the bank expects Sweden’s benchmark rate to reach 2.0 percent, down from the 2.4 percent included in earlier forecasts.

A year later, at the end of 2012, the repo rate is expected to climb to 2.9 percent, compared with an earlier forecast of 3.3 percent.

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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.”