Sweden’s central bank announces biggest interest rate hike in 30 years

Sweden's Riksbank has announced a shock one percent rise in interest rates, the biggest increase since it was given its two percent inflation target back in 1993.

Sweden's central bank announces biggest interest rate hike in 30 years
Sweden's Riksbank. Photo: Jonas Ekströmer/TT

The bank has decided to raise its key interest rate, the repo rate, by one percentage point to 1.75 percent, wrong-footing analysts who had expected the bank to hike rates by just 75 points to 1.5 percent 

At a press conference announcing the decision, Stefan Ingves, the bank’s governor, apologised for not acting sooner to head off inflation. 

“There is nothing to do but apologise that it took a little time before we understood what was happening to the Swedish economy,” he said. “We’ve been wrong on our predictions on a number of occasions, but when inflation is as high as it is right now, it’s obvious what we are forced to do.”

Sweden’s inflation rate hit 9 percent in August, the highest level since 1991, indicating that the rate hikes imposed earlier in the year have not yet started to pulls price rises down. 

In a press release announcing its decision, the bank warned that high inflation “hollows out households’ buying power and makes it harder for both companies and households to plan their finances”.

Ingves said at the press conference that the pain consumers will face if inflationary expectations are allowed to take hold exceeds the pain that will be caused by a greater-than-expected rate hike. 

“This is about weighting up today against tomorrow,” he said. 

As well as increasing the rate itself, the bank announced that it would increase it in the future more than it had previously forecast, with the rate now projected to hit 2.5 percent in 2023, compared to 1.9 percent in its earlier prognosis, and 2.5 in 2024, compared to 2.0 percent earlier. 

“The prognosis indicates that the rate is going to raised again in the coming six months,” the bank wrote. “There is great uncertainty over the outlook for inflation, and the Riksbank is going to adjust monetary policy in whatever way is needed to ensure that inflation returns to the target.” 

Robert Bergqvist, senior economist at Sweden’s SEB Bank, wrote after the announcement that the hike was “not a happy step but a completely necessary one”. 

He said it showed a united central bank “throwing all its weight behind an aggressive exit policy”, which he predicted would start to bring inflation under control in 2023, allowing rate cuts as soon as 2024. 

But the decision was criticised by Torbjörn Hållö, chief economist at the Swedish Trade Union Confederation, who on Twitter called the decision “bizarre”, and “beyond all sense and balance”. 

He argued that today’s high inflation rate was driven by power and fuel shortages, meaning increasing interest rates would have no impact. 

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Sweden’s union federation warns of increased layoffs after rate hike

The Swedish Trade Union Confederation (LO) has warned that the Riksbank's decision to hike its key interest rate on Tuesday risks increasing the number of people being laid off by companies.

Sweden's union federation warns of increased layoffs after rate hike

Laura Hartman, the chief economist at LO, said that the union was already seeing the number of people being laid off by their employers increase as Sweden’s economy started to enter a slow-down. 

“Unfortunately, it’s looking pretty grim and it’s not been made any better by the interest rate decision,” she said. “We are on the way into an economic slowdown, and the Swedish Public Employment Service has also said that we are on the way into a period of higher unemployment.” 

She said that the unions that are part of her confederation had already started reporting members losing their jobs. 

“We are seeing that redundancies are beginning to climb upwards. That’s the signal we’re getting from our unions. This is to do with the downturn in the business cycle, which is getting worse. We don’t have any numbers for it, but our latest forecast for June had growth of 1-2 percent.”

“That’s changed now, and some people think we are facing a negative growth.” 

READ ALSO: Sweden’s central bank announces biggest interest rate hike in 30 years

Hartman said that the rise in interest rates would hit members earning less than 30,000 kronor a month hard, at a time when they are already suffering from rising prices. 

Pontus Braunerhjelm, economics professor at KTH, said that the bank’s rate increase would “put the brakes on economic development and growth”, but he said it was important to “get rid of inflation”.