Riksbank votes no to base rate hike

The Swedish Riksbank has decided to leave base (repo) interest rates unchanged at 0.25 percent, it was announced on Tuesday.

Riksbank votes no to base rate hike

The Riksbank met on Monday to decide over whether to raise rates for the first time since just before the collapse of Lehman Brothers and the onset of the credit crunch in September 2008.

“The Executive Board of the Riksbank assesses that the repo rate needs to remain at a low level to support production and employment and to attain the inflation target,” the bank wrote in a statement on Tuesday.

The bank stated that the first rate hikes can be expected in “the summer or early autumn”.

The bank’s statement set an upbeat tone over the Swedish economy which is showing firm indications of recovery with a positive GDP forecast for 2010 on the back of a very weak 2009. The bank underlined that the low interest rate and expansionary fiscal policy will provide support to consumption, which has begun to increase.

The bank described the recovery in the labour markets as having come surprisingly early in the economic cycle.

“One sign that the Swedish economy is recovering is that employment has begun to increase and unemployment has stopped rising, which indicates a labour market turnaround.”

But it was noted that unemployment remained at a relatively high level with wage rises expected to remain accordingly low. Together with higher productivity and a stronger krona, inflationary pressures are forecast to remain relatively low over the coming years, the bank advised.

The bank left its forecast for inflation, GDP and the repo rate unchanged with the latter expected to return to 4 percent in the first quarter 2013.

Governor Stefan Ingves was unable to attend the meeting as he was in transit from Madrid, travelling overland due to the Swedish airspace shutdown.

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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.”