Sveriges Riksbank raises interest rates in political reverse
Sweden’s central bank made a dramatic turnaround on Thursday when it raised interest rates, said it would shrink its balance sheet and warned of more increases to come as it reacted late to rising inflation.
The Riksbank reversed the position it had at its previous meeting in February, when it sa it would only raise interest rates from zero towards the end of 2024. On Thursday, the bank raised its main repurchase rate to 0.25 percent and predicted that interest rates would probably reach 1 percent by the end of the year.
Sweden’s central bank has been surprised by the strength of inflation, but it forecast that prices would rise by 5.5 per cent this year, well above its previous forecast of 2.9 per cent and the target of 2 per cent.
“Inflation has risen to the highest level since the 1990s and will be high for some time. To counteract the fact that high inflation is anchored in pricing and wages, the Executive Board has decided to raise the repo rate, the Riksbank says in a press release. statement.
The central bank has long struggled with its inflation mandate and raised interest rates in 2010 only to have to lower them to below zero afterwards, a move that is often mentioned as a warning against monetary tightening by the US Federal Reserve.
This was followed by a five-year experiment with negative interest rates, which did not end until December 2019 after parts of the financial industry complained that it was making a profit.
After recovering from the covid-19 pandemic and with the addition of energy and food price shocks from Russia’s invasion of Ukraine, the Riksbank stood out with its call in February to keep the course at zero for several years to come even when other central banks tightened policy. It has now joined the global consensus on a tightening of policies to counter rising inflation.
The Swedish central bank warned that it was “more uncertain than usual” about how inflation would behave in the coming months, adding that “the risk outlook … is on the upside”, which means that prices may be higher than forecast.
“The Riksbank finally bowed to economic logic. . . and today’s announcement completes a remarkable turnaround from the bank’s so far decidedly dove stance, ”said David Oxley, senior European economist at Capital Economics.
The Riksbank also said that it will slow down the pace of its asset purchases during the second half of the year, which means that its balance sheet will begin to shrink. It will buy SEK 37 billion (USD 3.6 billion) in bonds in the second half of the year, half the level in the first six months.
Sweden’s growth is expected to slow significantly at the same time as inflation rises, with a gross domestic product now forecast at 2.8 per cent for this year and 1.4 per cent for 2023, both lower than February’s forecasts of 3.6 and 2 per cent respectively.