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UNEMPLOYMENT

Swedish banks: Interest rates set to rise

Two of Sweden's biggest banks, SEB and Nordea, have predicted that the Riksbank will raise its benchmark interest rate to 2 percent by the end of next year from its current level of 0.25 percent.

SEB bank has predicted the rate to reach 2 percent by the end of 2010 and 3 percent the following year.

SEB’s new economic forecast also sees a turnaround in fortunes for Sweden’s GDP, which it expects to plummet by 5 percent this year only to grow by 2 percent next year and a further 2.6 percent in 2011.

Unemployment is set to rise from 8.4 percent this year to 10.5 percent in 2010 and 10.7 percent in 2011.

“Last winter’s drama was of historic proportions, but it has also been met by crisis policies of historic proportions,” said SEB chief economist Robert Bergqvist.

“Also, the effect of the crisis policies has been stronger than we expected. So the situation is looking better than it did three months ago,” he added.

SEB expects unemployment to reach its peak in autumn of next year, meaning that this winter’s collective bargaining process will be carried out in a difficult period. SEB beleives this will lead to very low wage increases.

“We expect these to be the lowest agreements since the 1990s, with wage increase under 2 percent,” said Bergqvist.

Nordea bank’s latest prognosis also sees the Swedish economy gathering pace in the second half of this year.

“The picture we envisioned in the spring, with a recovery predicted in the autumn, has been confirmed by incoming statistics,” said Nordea chief economist Annika Winsth.

Nordea expects Sweden’s GDP to drop by 4.2 percent this year before rising by 2.8 percent next year and 2 percent in 2011.

Nordea predicts that unemployment will increase from 8.6 percent this year to 10.2 percent next year before falling back to 9.9 percent in 2011.

SEB and Nordea both expect the Riksbank to begin raising its benchmark interest rate in April next year. The rate currently rests at 0.25 percent.

“We don’t see any inflation risk but we still expect the Riksbank to raise the interest rate by half a percentage point at the beginning of April,” said Winsth.

While the Riksbank has intimated that the rate could remain extremely low for some time to come, Nordea believes that the central bank now has good cause to revise its prognosis.

Nordea also predicts a strengthening of the krona, with a rate of 9.40 kronor to the euro expected within the next twelve months.

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ECONOMY

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.” 

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