STOCKHOLM, Sept 29 (Reuters) – Sweden’s central bank must act robustly to bring inflation under control or rising prices could be entrenched, interest rate setters said in the minutes of the bank’s latest policy meeting, published on Thursday.

As recently as February this year, the Riksbank predicted that interest rates – then at 0% – would not rise until the second half of 2024. But rising prices throughout the economy have caused a dramatic change in policy.

Headline inflation hit 9.0% in August – a 30-year high – prompting the Riksbank’s biggest one-off hike since 1992, when the country was in the grip of a withering domestic financial crisis. Read more

“In order to secure the credibility of the inflation target, monetary policy needs to be fully focused on bringing inflation back to the target within a reasonable time,” says Riksbank Governor Stefan Ingves, who will leave the bank at the end of the year, in the minutes.

At its last meeting, the Riksbank raised its benchmark interest rate by a full percentage point to 1.75%, with further increases likely in November and then again in February next year. Read more

The Riksbank expects the policy rate to reach 2.5 percent during the second quarter of next year.

“We stick to our view that the Riksbank will raise the policy rate by 75 basis points in November and 25 basis points in February,” says Swedbank in a note. “But we are noticing signs of increasing divergence within the board.”

BALANCE SHEET

While rate-setters agreed on the need for tighter policy, the central bank faces a tough balancing act.

As early as next year, the economy is expected to shrink and further interest rate hikes will increase mortgage costs for households already struggling with energy bills that are double what many are used to. Read more

Consumer confidence is already at rock bottom and house prices are falling. Read more

However, the price increases have turned out to be wider and more persistent than the Riksbank expected.

Not doing enough now risks that “even higher interest rate increases will be required later,” said Deputy Riksbank Governor Anna Breman, but added: “Too much austerity would instead risk leading to a deep and protracted recession, creating difficulties in maintaining the medium-term inflation target . long-term.”

Both Breman and Deputy Riksbank Governor Martin Floden saw the inflation risks as balanced.

“It is easy to imagine both scenarios where the rate needs to be raised more than in the forecast and scenarios where it is appropriate to raise the rate by less,” Floden said in the minutes.

“I can also think of scenarios where it is appropriate to keep the rate unchanged at the next monetary policy meeting.”

Markets are betting that sustained high inflation will force the Riksbank to be more aggressive than its current plans, with the key rate seen peaking around 3.5% in the middle of next year.

The krone currency, which has lost 7% of its value against the euro this year, strengthened slightly after the protocol was published.

Reporting by Stockholm Newsroom; Editing by Niklas Pollard, Johan Ahlander and Jan Harvey

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