Borg forecasts major interest rate cut

Sweden's Finance Minister Anders Borg has predicted that the Riksbank will cut its benchmark interest rate over the next year to a level much lower than that anticipated by analysts.

Citing a reduction in social contribution fees paid by employers as the main cause, Borg said he expected the repo rate to fall from today’s 4.75 percent to 3 percent a year from now.

The Finance Department expects the rate to level out in 2010 at 3.25 percent.

“This is connected to the fact that we have budgeted for lower social contribution fees, which will affect wage costs by one percentage point in 2009. This in turn will have an effect on underlying inflationary pressures,” Borg told news agency TT.

The Finance Minister explained that proposed lower charges for employers could be regarded as equivalent to a one percentage point cut in wage levels agreed on in the most recent round of collective bargaining.

Mortgage holders with variable exchange rates are expected to be among the main beneficiaries should the Riksbank choose to heed Borg’s prediction.

The Swedish central bank has so far not indicated a drop anything like as precipitous as that advocated by Borg. In its most recent statement on the matter, the Riksbank said it expected the repo rate to fall to 4.3 percent by the third quarter of 2010.

The National Institute of Economic Research (Konjunkturinstitutet) is trading the middle ground between the minister and the central bank. It expects the Riksbank to cut the repo rate to 3.75 percent in 2009 and 3.50 percent in 2010.


Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”