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INTEREST RATE

Sweden’s central bank hikes interest rate

Sweden's central bank, the Riksbank, has hiked its interest rate by 0.25 percentage points to 1.5 percent and at the same time increased its forecast for future interest rates.

Published: 15 February 2011 09:42 CET
Sweden's central bank hikes interest rate

“They raised rates as expected and they also raised the repo rate quite properly, which we think is correct and also was expected by the market,” Annika Winsth, chief economist at Nordea, said regarding the Riksbank’s announcement.

According to Winsth, the Riksbank is expressing the view that the Swedish economy is developing stronger than global markets.

“That is what we have seen since the last meeting, that it is stronger than the US, for example. And they have realised this, so that is why they made this decision and we think that is correct and proper,” she said.

The Riksbank also revised up its forecast for the development of its key interest rate. In the second quarter the repo rate is expected to average 1.7 percent, an upward revision from the December assessment of 1.6 percent.

In the first quarter of 2012, the rate is forecast to be 2.5 percent compared with 2.2 percent. In the following year, the Riksbank anticipates having raised interest rates to 3.6 percent.

The decision to raise rates on Tuesday was not however unanimous among members of the Riksbank board.

Two members of the Riksbank’s executive, Karolina Ekholm and Lars E.O. Svensson, expressed their reservations against the decision to raise rates, as well as the decision to write up the trajectory of the interest rate.

“So there is a divided view on the executive board,” Annika Winsth concluded.

The Riksbank expects GDP to grow by 4.4 percent this year, unchanged from the previous forecast. GDP is seen rising by 2.4 percent in 2012, a marginal upward revision. The following year, GDP is expected to increase by 2.5 percent.

The bank has also revised its inflation forecast, with CPI (Consumer Price Index) at 2.5 percent this year compared with the previous forecast of 2.2 percent. In 2012, inflation will reach 2.1 percent compared with the previous 2 percent, then rising to 2.6 percent in 2013.

“International growth is contributing to rising energy and commodity prices. The higher prices temporarily push up inflation in Sweden, but are also expected to indirectly continue affecting inflationary pressures throughout the forecast period,” the Riksbank wrote in a statement on Tuesday.

However, the stronger Swedish krona has contributed to dampening underlying inflation.

The Riksbank has also revised its estimates on unemployment. It now expects the unemployment rate at an average 7.3 percent this year, 6.8 percent next year and 6.4 percent in 2013, 0.2 percentage points lower than the previous assessment for all three years.

Market interest rates fell, while the krona strengthened against both the euro and the dollar immediately after the Riksbank’s interest rate change and revised forecast were announced.

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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.

Published: 16 March 2023 16:20 CET
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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