Europe's news in English

COPY LINK

RIKSBANK

Central bank in surprise rate rike

Sweden's central bank, the Riksbank, surprised markets today by raising its main interest rate, the repo rate, by 0.25 percentage points to 4.25 percent.

Published: 13 February 2008 12:32 CET

The Riksbank said in a statement that Sweden’s economic outlook and inflation prospects remained largely the same as in December.

“Economic activity in Sweden remains good and the labour market is strong. GDP growth will slow down over the year and the increase in employment will slacken. Resource utilization in the economy will nevertheless be higher than normal,” said the Riksbank in a statement.

The move caught analysts and markets off guard, with most having expected rates to remain unchanged.

The krona shot up against both the dollar and the euro on the news, and finanical market professionals were quick to criticize the Riksbank.

“It’s very unexpected. I was surprised. There are slow downs in the world economy, Swedish export markets, and wage growth. And despite all this, the Riksbank thinks there is reason to raise interest rates,” said Jörgen Appelgren, cheif economist with Nordea.

The bank said that it had taken into account the recent turmoil in the world economy but had come to the same conclusion as in December.

“The repo rate needs to be raised to 4.25 per cent and the assessment is that it will remain at roughly the same level over the coming year. But there is considerable uncertainty in this assessment.”

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

Url copied to clipboard!