Sweden’s Riksbank raises interest rates

Sweden's Riksbank on Wednesday announced that it has raised the base repo rate by 0.25 percent to 1.75 percent.

Sweden's Riksbank raises interest rates

The bank announced that the repo rate forecast remained unchanged.

“The Swedish economy remains strong. Underlying inflation is currently low, but is expected to increase as economic activity strengthens. At the same time, CPI inflation is now high as a result of rising mortgage rates,” the Riksbank wrote in a statement.

The Riksbank observed that while underlying inflation remained low in Sweden, it is expected to rise as the rate of wage increases accelerates and spare economic capacity declines.

The bank observed that economic prospects remained largely the same as in February with the repo rate path unchanged in relation to the Monetary Policy Report published in April.

This means that the Riksbank expects a repo rate of 2.5 percent in the first quarter 2012, climbing to 3.2 percent in 2013 and 3.6 percent in 2014.

The Riksbank hiked its growth forecast for 2011. GDP is now expected to climb by 4.6 percent in comparison to a previous estimate of 4.4 percent. The forecast for 2012 has been marginally cut to 2.3, from a previous 2.4 percent.

The Consumer Price Index (CPI) is forecast to climb 3.2 percent this year and 2.8 percent in 2012, up from a previous forecast of 2.5 and 2.1 respectively.

Underlying inflation (CPIF) projections were at the same time cut for 2011, but raise for 2012 and come in just under the 2 percent goal.

Deputy Governors Karolina Ekholm and Lars E.O. Svensson entered a reservation against the decision to raise the repo rate and against the repo rate path of the Monetary Policy Update.

The pair preferred to maintain a repo rate of 1.5 percent and a repo rate path that first rises slower and then faster than that of the Update, to about 3.9 per cent by the end of the forecast period.

Such a repo rate path implies CPIF inflation closer to 2 per cent and a faster reduction of unemployment towards a longer-run sustainable rate.

The minutes from the Executive Board’s monetary policy discussion will be published on May 3rd 2011.

The Swedish krona strengthened marginally against both the US dollar and euro in early trading on Wednesday.

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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.”