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RIKSBANK

Sweden’s record-low interest rate kept unchanged, again

The Swedish repo rate, which has stayed below a historic zero since the beginning of 2015, was on Thursday once again left unchanged at a record -0.50 percent, the central bank announced.

Sweden's record-low interest rate kept unchanged, again
The head of Sweden’s central bank, Stefan Ingves, on Thursday announced that the repo rate will be kept unchanged. For now. Photo: Janerik Henriksson/ TT

In its decision, the Riksbank said that global economic activity currently remains favourable, but warned that “there is considerable uncertainty over future developments.” This, it said, is because although international inflationary pressure is still moderate, it is expected to rise going forward.

The central bank said that the Swedish economy is still strong and that inflation remains close to the target of 2 percent, but noted that this was “largely due to rapidly rising energy prices. Thanks to Sweden's strong economic activity, however, inflation is expected to stay close to the target even when the fast-paced “increase in energy prices slows down”.

The interest rate may therefore soon be raised.

“If the economy develops as expected, there will soon be scope to slowly reduce the support from monetary policy. The forecast for the repo rate indicates that it will also be held unchanged at the monetary policy meeting in October, and then raised by 0.25 percentage points, either in December or February.”

Once again, the central bank pointed to the risks associated with keeping interest rates low for too long.

“The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. Achieving long-term sustainable development in the Swedish economy therefore requires measures within housing policy, taxation policy and, where necessary, macroprudential policy.

The Riksbank took the landmark decision to slash the key interest rate, the repo, below zero in February 2015, hoping that the strategy would boost inflation to raise the price of everyday goods and services which had been stagnant in recent years, and therefore improve the Nordic nation's economic prospects.

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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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