Riksbank raises base rate to 0.75 percent

Sweden's Riksbank has raised the repo rate by 0.25 percentage points to 0.75 percent, a decision which was widely forecast.

Riksbank raises base rate to 0.75 percent

Sweden’s economy is continuing to show good strength, several recent reports have indicated, with low inflationary pressures which are expected to increase as the economy continues to rebound.

The rate was thus raised in order to attain the inflation target of 2 percent in the longer term, although analysts questioned whether the current low crisis rates were becoming indicative of more normal recession level rates.

“The interest rate should be hiked from today’s crisis rates to a more normal recession level rate,” said Elisabet Kopelman, an SEB analyst said ahead of the decision.

The decision is likely to impact on variable mortgage interest rates, which have begun to climb from record low levels in recent months in anticipation of the Riksbank decision.

The Riksbank last raised the repo rate in June from 0.25 to 0.5 percent, the first climb since shortly before the finance crisis broke out with the collapse of US investment bank Lehman Brothers in September 2008.

The bank’s monetary policy update in June, which indicated an easing of the repo rate path to indicate that rates would rise at a slower pace than previously indicated, remains unchanged.

Riksbank governor Stefan Ingves has previously warned households to expect variable mortgage rates of around 6 percent in a couple of years.

Deputy governor Lars E O Svensson entered a reservation against the decision to raise the repo rate to 0.75 percent, and against the repo rate path in the current monetary policy update. Deputy governor Karolina Ekholm entered a reservation against the repo rate path.

Svensson would have preferred to see the rate remain at 0.5 percent, with the rates peaking at 1.75 percent by the end of 2011, while Ekholm preferred a flatter rate path culminating around a percent lower than currently project in the monetary policy update.

Ekholm argued that weaker development overseas could be expected to impact in growth and inflation in Sweden.

Inflation, measured with the consumer price index, is projected to amount to 1.1 percent in 2010, rising to 1.9 percent in 2011 and 2.5 percent in 2012.

Repo rates are projected to climb to 0.9 in the fourth quarter, to 1.9 percent by the end of 2011 and to an average of 3 percent in 2012.

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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.”