Sweden is getting ready for the biggest price increase this century
The Riksbank is leading the global charge against inflation this week with an aggressive rate hike that is likely to be the biggest in nearly three decades since the Swedish central bank introduced its current policy framework.
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(Bloomberg) — The Riksbank will lead the global charge against inflation this week with an aggressive rate hike that is likely to be the biggest in nearly three decades since the Swedish central bank introduced its current policy framework.
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While most economists expect the Stockholm-based central bank to follow the European Central Bank and deliver a 75 basis point hike, several say a bigger move cannot be ruled out. Both options would amount to the largest increase since the Riksbank’s current policy regime, with an inflation target of 2%, was established in the 1990s.
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An increase of 100 basis points would make Sweden only the second of the group of 10 jurisdictions with the world’s most traded currencies to make such a move this year — after the Bank of Canada in July. It could also set the tone for a torrid week of policymaking, with some investors speculating the U.S. Federal Reserve may do the same on Wednesday.
In any case, a large increase on the part of the Riksbank will show an increased concern about inflation, which officials were slow to grasp and react to in the Nordic region’s largest economy. At 9%, it is the highest in three decades and has exceeded the central bank’s forecasts for 11 consecutive months.
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Governor Stefan Ingves admitted earlier this month that after underestimating inflation, small increases in interest rate hikes may not be enough. He also said previous guidance for a half-point hike this week is no longer valid.
The Riksbank is facing a dilemma familiar to its global colleagues, how to curb inflation without damaging the economy too much. It is particularly acute in Sweden, where household indebtedness is high and more than 40% of mortgages have interest rates that are set for periods of no more than three months.
The turnaround in monetary policy has already taken a toll on a previously booming housing market, with home prices falling steadily from a peak earlier this year.
What Bloomberg Economics Says…
Our forecast puts the Riksbank’s policy rate at 2.25% at the turn of the year. Uncertainty about energy prices and rising electricity costs – especially for southern Sweden, where electricity prices have almost tripled during the month of August – pose upside risks to this outlook.
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—Selva Bahar Baziki, economist in Sweden and Turkey. To read the full report, click here
While the risk of an increase of whole percentage points has increased, it may be a step too far for Ingves and his colleagues, according to Swedbank’s chief economist Mattias Persson. He expects that such a large increase would hurt households, which are now postponing large expenses under pressure from energy costs.
“The economy is already slowing down, especially in terms of consumption,” he said in a phone interview. “We’ve also seen companies like Electrolux and Thule warn about profits and announce cost savings.”
One argument for a 100 basis point move is that the strength of inflation has meant that officials have fallen far behind the curve, Persson added.
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More aggression can also help the Riksbank to dampen imported inflation. While board members have largely avoided commenting on declines in the krona, Deputy Riksbank Governor Martin Floden said last month that the currency is “far too weak”, and that it should strengthen based on expectations that the Riksbank will act more decisively than the ECB.
Since then, the krona has lost more ground against both the euro and the dollar, and is the second worst performer of major currencies this year. Nordea’s chief analyst Torbjörn Isaksson says the exchange rate posed “a dilemma”.
The krona “could weaken if the Riksbank does not raise the policy rate sufficiently”, he said. “On the other hand, significant interest rate increases can disrupt the housing market.”