Europe's news in English

COPY LINK

INTEREST RATES

Riksbank was split over rate hike

There was dissent within the ranks of the Riksbank's leadership during the September 4th decision to raise interest rates, according to minutes of the meeting released on Wednesday.

Published: 17 September 2008 10:16 CEST

Riksbank was split over rate hike

The Riksbank raised Sweden’s benchmark interest rate, the repo rate, by 0.25 percent to 4.75 percent, despite the reservations expressed by three members of the Executive Board.

The deciding vote in favour of the rate hike was cast by Riksbank Governor Stefan Ingves.

The three deputy governors who opposed the move, Lars Nyberg, Irma Rosenberg and Barbro Wickman-Parak, expressed reservations against both the decision to raise the rate as well as the repo rate’s future direction.

Following the publication of the Riksbank minutes, the Nordea bank altered its interest rate forecast.

Nordea’s head analyst Torbjörn Isaksson said the news of a split decision came as no surprise.

“But they were also split about the future rate path and three members of the board wanted to see a lower rate path. That was really not expected. And it shows that the first rate cut is coming sooner.”

Previously, Nordea had projected that the Riksbank would lower rates in April.

“But in light of the recent developments, it looks like it will likely come in Feburary or even earlier. So we’re changing our forecast to February and it’s possible it will come oven sooner,” said Isaksson.

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!