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ECONOMY

Sweden’s central bank brings in biggest rate hike in 22 years

Sweden's Riksbank has raised interest rates by 50 points to 0.75 percent, in its biggest rate hike in 22 years.

Sweden's central bank brings in biggest rate hike in 22 years
Sweden's Riksbank: Jonas Ekströmer/TT

“Inflation is much too high and is spreading throughout the economy,” the bank’s governor, Stefan Ingves, said. “This is noticeable and expensive, both for households and others, and is creating uncertainty in the Swedish economy. That’s why we need to hike the rate.” 

The central bank explained in a press release that a larger hike was required to “to ensure that inflation returns to target” and make it “clear to price- and wage-setters that the inflation target can continue to be used as a benchmark”. 

Annika Winsth, chief economist at the Nordea bank, said that anything less than a so-called “double increase” would have left inflation to continue increasing. 

“Anything else would have messed things up,” she said. “We have extremely high inflation, and also high domestic inflation. That’s why there’s a need to push back and the interest rate weapon is the tool the Riksbank has.” 

“What we’ve seen today is no shock,” agreed Jens Magnusson, chief economist at SEB. “Anything else apart from this raise by 50 points would have been a shock. Inflation has taken off in a way the Riksbank hadn’t expected. The signal this gives is that the Riksbank takes it seriously and is trying to get a grip on the situation.” 

In the press release, the bank said that prices for goods, food and services in Sweden had been increasing “considerably faster than expected” since the start of the year. 

The imbalances that have arisen as a result of demand bouncing back from the pandemic faster than businesses ability to supply, it said, had been “reinforced” by Russia’s invasion of Ukraine and new pandemic-related restrictions in China. 

 “The high rate of inflation in Sweden and abroad is affecting households and is undermining purchasing power,” it concluded. “Central banks around the world are now tightening monetary policy to cool down economic activity and bring inflation down.”

The Riksbank said that companies had begun to raise prices “unusually strongly in relation to how much costs have increased”, which was causing inflation to accelerate faster than expected. 

The bank said it was now predicting that its key interest rate would rise to 1.36 percent in the last three months of 2022, up from the 0.81 percent it predicted at the end of April. 

Between the start of April and the end of June next year, it will rise to 1.9 percent (up for 1.18 predicted in April), and in the last six months of 2025, the rate will hit 2.06 percent, it predicted. 

The central bank expects inflation to average at 7.6 percent over 2022 as a whole, up from six percent in its previous prognosis, falling to 7.1 percent in 2023. 

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PROPERTY

Why is Sweden seeing ‘biggest drop in house prices since Lehman’?

Housing prices in Sweden are dropping much faster than most experts predicted, with one analyst calling it "the biggest drop since the Lehman crash". How long prices continue to fall for and how should buyers and sellers react?

Why is Sweden seeing 'biggest drop in house prices since Lehman'?

How fast have house prices in Sweden been falling? 

Property prices have been dropping considerably faster than most analysts expected.

“We are on the way to having an extremely dramatic half year,” Nordea’s analyst, Gustav Helgesson, told TT. “It was expected that they would go down, but this is still very dramatic. In one month, we’ve had the biggest fall since the Lehman crash.” 

Stockholm is where the falling trend has hit the hardest, with property prices dropping around 8 percent over the last three months.

Historically, prices are lower and more volatile during the summer months and if you take this into account, the drop is only 2.2 percent. 

What’s driving the fall in prices? 

House buyers in Sweden have just witnessed “one of the biggest increase in interest rates for households in modern times”, Helgesson pointed out, adding that his bank did not expect interest rates to drop anytime soon. Their forecast is instead that the policy rate will be at 2 percent by the end of year, a substantial increase from today’s 0.75 percent.

Nordea now believes that the drop in property prices will continue, and that towards the end of next year, prices could drop by 10 percent, more even than in March. 

According to Robert Bergqvist, senior economist at Swedish bank SEB, the price drop is bigger than analysts originally anticipated: “Obviously the interest rate hikes have had a very big effect,” he said. “People believe this is the end of low interest rates, and then there’s also a continuing worry over inflation”. 

According to an indicator published by Sweden’s SEB bank, only 31 percent of those interviewed believed that prices would continue to rise in the coming year, an 11 percent decrease on last month. Around half of those interviewed believed instead that prices would fall.

“We are heading towards a very dramatic six months, or at least until the end of the year. Housing prices are depressed, interest rates have a lot of power and in the short term, rates have not increased as much as they are going to”, Helgesson said. 

So could the falls be permanent, or at least take years to recover? 

Prices are unlikely to stay this low for very many years, Bergqvist said, pointing to the continuing housing shortage in Sweden. 

In SEB’s survey, 204 out of 290 reported that there was shortage in the housing market in May. This could lead to price increases in the future unless new housing is built, he predicted. 

“It is not necessarily positive: if there are no building developments, there is also a loss of growth and people can’t move into places where jobs are available. Our demographics show that we must continue building, otherwise prices will stay high”, he said.

How should buyers and sellers react to the falling market? 

Bergqvist underlined that people still tended to have a different perception of market, depending on which side of the property sale they stood. Sellers tended to still have a lot of optimism, while buyers were more pessimistic.

This, he said, was creating an unbalance in the market, which Berqvist predicted would slow down the housing market in the coming months, and then lead to continuing declines, as sellers slowly accepted lower prices. 

Bergqvist advised sellers who have already bought a new house to be as flexible as possible on the price they get for their old one. 

“The most important thing to try to get out of the place you are trying to sell as fast as you can,” he said. “It’s not the time to look back and have too high expectations. It’s best not have two properties”.

He also underlined the importance of having a margin when selling, warning that it is always hard to hit the highest or lowest price possible when negotiating the sale of a property.

“But if you wish to have your property in the long run, then it’s not too important what happens with house prices in the short term perspective,” he said. 

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