Ex-Riksbank official bashes rate policies

Lars E O Svensson, the former Deputy Governor of the Riksbank who left in a dispute about interest rates, has renewed his criticism of the central bank's monetary policy, arguing it has increased unemployment.

Ex-Riksbank official bashes rate policies

In a speech at a conference on Monday to mark 20 years of the Riksbank’s two-percent inflation target, Svensson alleged the bank had failed to fulfill its goal of stable prices and a sustainable level of unemployment.

He blamed policies pushed in recent years under current Riksbank head Stefan Ingves that have been designed to reduce the risks associated with Sweden’s high-levels of household debt.

“Household debt levels shouldn’t be a new goal for the Riksbank,” Svensson said in his speech.

Svensson, considered an interest rate “dove” during his tenure at the Riksbank, left the bank in frustration in mid-May saying he had “failed” to convince his colleagues of the merits of keeping interest rates low.

In Monday’s speech, he argued that Sweden’s unemployment rate would be one percent lower today if Sweden’s benchmark interest rate, the repo rate, had remained at 0.25 percent since 2010.

And inflation would likely be closer to the Riksbank goal of two percent, Svensson continued, rather than much lower levels experienced since mid-2012.

He argued that hiking the repo rate to two percent before then needing to lower it again to today’s one percent level has had “negligible” effects on lowering the level of household debt in Sweden.

Riksbank Deputy Governor Karolina Ekholm agreed that inflation levels were lower than she’d like, but added that inflation targeting was still relevant in the wake of the financial crisis.

“For me, it’s the lynchpin in what we do,” she told the TT news agency.

Ingves, however, disagreed with Svensson’s critique of the two-percent inflation target.

“For the most part, it’s worked well, especially of you look at how things were in the early- and mid-1990s,” he told TT.

“Looking back, it’s been successful.”

The Riksbank’s next interest rate decision is due in early July, and the addition of two new members to the governing board combined with the ongoing economic uncertainty in Europe makes it harder than usual to predict whether or not there will be a change in the repo rate.

“Certain things look stronger than what we included in our last forecast and some things look a little weaker,” said Ekholm.

TT/The Local/dl

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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.”