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Riksbank interest rate hikes ‘in doubt’: experts

Swedish experts have expressed scepticism that the Riksbank will raise base interest rates when it meets to discuss monetary policy on September 6th, after a renewed day of stock market turbulence in Stockholm.

Annika Winsth, chief economist at Nordea, is among those expecting the Riksbank to hold rates at the current level.

“If the mood is the same when they enter the meeting, then we don’t believe they will raise rates. At the moment the market is very negative, more or less free-fall,” Winsth said.

She added that the development is so dramatic that it is impossible to predict how the situation will be in September and what the Riksbank’s decision will be.

Swedbank meanwhile has retained its forecast that the Riksbank will raise interest rates again this year, but recognised that the current market turmoil increases uncertainty over the bank’s plans.

“We have an increase in September in our official forecast, but it is clear that there is a downside risk to it in the current situation,” said Martin Tallroth, interest rate strategist at Swedbank.

Tallroth added that it is “entirely possible” that the Riksbank would leave rates unchanged for the remainder of 2011.

“Absolutely, it is entirely possible. But our official forecast is for an increase for this year,” he said.

Riksbank’s interest rate forecast, published on July 5th, indicating a further two rate hikes of 0.25 percentage points each, to 2.5 percent by the end of the year.

The Stockholm stock exchange oscillated wildly on Tuesday in a second day of market turbulence. After initial falls in the OMXS index of as much as -4.3 percent, the market rebounded to around -0.8 percent by lunchtime.

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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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