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INTEREST RATE

Sweden raises interest rate by 0.25 percent

Sweden’s Riksbank raised the country’s benchmark repo rate by 0.25 percent on Tuesday, bringing the interest rate up to 1.0 percent.

Sweden raises interest rate by 0.25 percent

“The Swedish economy is growing rapidly. Inflationary pressures are low, but are expected to increase as economic activity strengthens,” the Riksbank said in a statement.

The Riksbank added, however, that it doesn’t expect to raise rates much “in the coming years” due to “weak developments overseas”.

The move marks the third consecutive boost for Sweden’s benchmark interest rate, bringing it back to a level not seen since April 2009 when the Riksbank halved rates from 1 percent to 0.5 percent.

In explaining its decision to raise rates by a quarter-point, the Riksbank said that Sweden’s economy is “developing well”, displaying positive signs in terms of public finances, household savings, and consumption. Employment has also picked up rapidly as a result, according to the Riksbank.

But the Riksbank also argued that economic uncertainty abroad needed to be taken into account.

“The recovery will take time in the United States, while the major fiscal policy tightening measures in several European countries are dampening growth in Europe. The slow recovery of these countries is leading to moderate inflationary pressures and low international interest rates,” said the bank.

Questions about the pace of economic recovery overseas also led the Riksbank to lower its forecast for how Sweden’s repo rate may be adjusted in the future.

“All in all, developments abroad, together with the low inflationary pressures prevailing in Sweden during the forecast period, argue against the need to raise the repo rate as rapidly in the coming years,” said the Riksbank.

The Riksbank now projects the repo rate to reach 1.3 percent in the first quarter of 2011, compared with a previous forecast of 1.4 percent.

By the final quarter of 2011, the bank expects Sweden’s benchmark rate to reach 2.0 percent, down from the 2.4 percent included in earlier forecasts.

A year later, at the end of 2012, the repo rate is expected to climb to 2.9 percent, compared with an earlier forecast of 3.3 percent.

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ECONOMY

Riksbank deputy ‘open to reconsidering raising rates in April’

Martin Flodén, the deputy governor of Sweden's Riksbank, has questioned whether the central bank needs to bring in further rate rises in April, following bank runs on two niche banks in the US and a crisis of confidence at Credit Suisse.

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.

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