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Sweden’s central bank hikes core rate to highest level in 14 years

Sweden's Riksbank central bank announced a further 75 point increase in the core interest rate on Thursday, in what it likely to be the last interest rate decision by outgoing governor Stefan Ingves.

Published: 24 November 2022 11:11 CET

Sweden's central bank hikes core rate to highest level in 14 years

Sweden's Riksbank governor holds a press conference on Thursday announcing the rate rise. Photo: Fredrik Sandberg/TT

While the 75 point hike was expected by the market, the bank signalled that it now expected rates to peak at 2.8 percent next year, up from 2.5 percent in it previous forecast.

“Inflation is too high and it’s creating problems for many, many households and many, many others,” Ingves said at a press conference after the announcement.

“Our judgement right now is that the core rate is going to need to be hiked again at the beginning of next year and will end up somewhere around 3 percent. This unusually high inflation that we’ve had demands unusually big increases in the core rate.”

Thursday’s rate announcement follows the 100-point rise in interest rates announced at the end of September, the biggest single increase the central bank had made in 30 years.

It means the country’s core interest rate will have risen from zero to 2.5 percent in less than a year.

“I think that’s too much. The Swedish economy is starting to buckle,” said Annika Winsth, chief economist for the Nordea bank. “It’s a little bit more aggressive than we expected. It’s not certain it will happen, and if it does, it won’t be good for the Swedish economy.”

“The prognosis indicates that the core interest rate is probably going to be further increased at the start of next year to just under 3 percent,” the bank wrote in a press release. “The Riksbank is going to adapt monetary policy to whatever is required to make sure that inflation returns to the target level within a reasonable period.”

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Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview.

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken.

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.”

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.”

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said.

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.

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