Sweden cuts interest rate amid eurozone worries

Sweden's central bank cut the country's benchmark interest rate by 0.25 percent on Tuesday, at the same time signaling the rate would remain low throughout 2012.

Sweden cuts interest rate amid eurozone worries
Lower rates put more money in the pockets of Swedes with flexible rate mortgages

The rate, known as the repo rate, now stands at 1.75 percent.

In announcing the decision, the Riksbank cited uncertainty in the eurozone, as well as the dampening effects the sluggish European economies are expected to have on growth prospects in Sweden.

While Swedish economic growth was “strong” in 2011, according to the bank, there are signs that the economy is slowing down.

“There has been a fall in orders to Swedish export companies and exports will be much weaker next year,” the bank said in a statement.

“Households and companies will postpone their consumption and investment as a result of the poorer outlook.”

Weaker demand is also expected to result in higher unemployment in 2012, according to the Riksbank.

With eurozone worries and lower demand keeping inflationary pressures at bay, the Riksbank elected to cut Sweden’s interest rate by a quarter point.

In addition, the bank said it was lowering the repo-rate path, expecting rates to remain low throughout next year.

“Later on, when inflationary pressures increase, the repo rate will need to be raised gradually,” the bank said, emphasizing, however that there was “considerably uncertainty” about future economic developments.

“The public-finance problems in the euro area in particular may become more serious and have more negative effects on the Swedish economy. In this situation, the repo-rate path may need to be lower,” the bank said.

“On the other hand, it is possible that confidence in the public finances of the euro countries will recover more quickly than expected.”

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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.”