Sweden is raising interest rates by whole percentage points with more to come
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STOCKHOLM, Sept 20 (Reuters) – Sweden’s central bank raised interest rates on Tuesday by a bigger-than-expected full percentage point to 1.75%, warning of more to come in the next six months as it tries to tackle rising inflation.
Inflation reached 9% – a 30-year high – in August as the effects of rising energy prices spread through the economy and have exceeded the Riksbank’s forecasts. Read more
The interest rate increase was the largest since the inflation target was adopted in 1993, which corresponded to the full percentage point increase in November 1992 during Sweden’s domestic financial crisis when the main interest rate for a short period reached 500%.
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“When interest rates go up, interest costs obviously rise for many households, but the costs of high inflation – sustained high inflation – they are in fact even greater,” Riksbank Governor Stefan Ingves told reporters.
“By raising interest rates now and by continuing to raise interest rates, we reduce the risk that inflation will park itself at a high level.”
A majority of analysts in a Reuters poll had forecast a 75 basis point rise on Tuesday, with only two expecting a full percentage point.
The Swedish krona was unchanged after initially rising on the interest rate announcement.
There is little the central bank can do about the current level of inflation. But rate-setters do not want rising prices to spill over into higher wage demands, which would make the job of returning to the 2% inflation target much more difficult in the longer term.
Interest rate increases continue despite forecasts Sweden’s economy is headed for a sharp decline – possibly even a recession.
The Riksbank forecast that GDP would shrink by 0.7% next year.
Rate setters now see the policy rate peaking at around 2.5% in the second quarter of next year, rather than a peak of 2% at the start of next year in June.
“We … think the policy rate will be higher than that and we do not rule out a peak of 3.5% at the end of 2023,” said Lars Kristian Feste, head of interest income at Ohman Group.
“The reason is that inflation will not fall as quickly as in the Riksbank’s forecast of around 2.0% in 2024.”
The markets also see the policy rate peaking at around 3.5%.
Sweden’s economic downturn poses an immediate challenge to the new government, which is expected to be formed by a four-party right-wing bloc that won the most seats in a national election earlier this month. Read more
Tax cuts are likely to be on the agenda, although Governor Ingves said fiscal policy would be better focused on structural reforms than holding up demand.
Other central banks are also expected to continue to tighten monetary policy.
Earlier this month, the European Central Bank raised its key interest rate by 75 basis points, following two such hikes by the US Federal Reserve. Read more
Analysts are betting there will be no let-up in the rate of hikes from the Fed and ECB, while other central banks, such as the Swiss National Bank, are likely to follow suit with aggressive hikes. Read more
The US, UK, Norway, Switzerland and Japan all have monetary policy meetings this week.
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Reporting by Stockholm Newsroom; editing by Niklas Pollard and Susan Fenton
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