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BREAKING

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.

Published: 20 September 2022 09:39 CEST
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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POLITICS

Full steam ahead for Swedish economy in new three-part budget bill

Sweden has won the fight against inflation and expects GDP to grow next year, Finance Minister Elisabeth Svantesson proudly proclaimed as she presented the government's budget bill for 2025.

Published: 19 September 2024 08:33 CEST
Full steam ahead for Swedish economy in new three-part budget bill

“Going forward, the task will be to ensure that high inflation does not return, and at the same time to implement reforms and investments that build a more prosperous, safer and more secure Sweden for generations to come,” said Svantesson in a statement on Thursday morning.

The government predicts that Swedish GDP will grow 2.5 percent next year followed by 3.2 percent 2026.

The 2025 budget, worked out in collaboration between the right-wing government coalition and far-right Sweden Democrats, is far more expansionary than the restrained budget Svantesson presented last year when Sweden was still fighting high inflation: 60 billion kronor towards new reforms rather than 39 billion kronor for 2024. Almost half, 27 billion kronor, will go towards funding lower taxes.

ANALYSIS:

Svantesson highlighted three areas in which new reforms are prioritised:

  • Strengthening household purchasing power after several years of the high cost of living putting a strain on household budgets, with reforms set to push the tax burden to its lowest level since 1980, according to the government.
  • Reinstating the “work first” principle, meaning that people should work rather than live on benefits. Some of the measures include language training for parents born abroad and increasing the number of places in vocational adult education.
  • Increasing growth, focusing on investments in research, infrastructure and electricity supply.

In the debate in parliament on Thursday, the centre-left opposition is expected to criticise the government for lowering taxes for high-income households and not investing enough in welfare. 

Investments in healthcare, social care and education are significantly reduced in this budget compared to last year: down from 16 billion kronor to 7.5 billion kronor. 

More to come

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