sweden

Rate rises might start to happen a bit quicker in Sweden following today’s rate rise. The repo rate rose 25bp to 1.5 per cent to help stabilise inflation and avoid resource utilisation being too high:

Inflationary pressures are still low in Sweden, but are expected to increase as economic activity strengthens… To stabilise inflation close to the target of 2 per cent and to avoid resource utilisation being too high, the repo rate needs to gradually increase. The Executive Board of the Riksbank has therefore decided to raise the repo rate by 0.25 percentage points to 1.5 per cent. The assessment is also that the repo rate needs to be raised somewhat faster in the coming period. 

“The Swedish economy is growing at a record rate.” This is the opening sentence of the Riksbank’s announcement that it is continuing its rate raising schedule by hiking rates 25bp. The move was widely expected. Two MPC members entered reservations about the rise and rate path, as with the last rate rise a month ago.

“Underlying inflationary pressures are still low in Sweden,” says the Bank, “but are expected to increase as economic activity strengthens.” Inflation will be pushed temporarily higher by the cost of electricity and commodities but underlying pressures will be low as a result of low labour costs. 

The Riksbank has raised Sweden’s repo rate 25bp to 1 per cent, citing a rapidly growing economy. Inflationary pressures remain low but are expected to rise. The country’s central bank has said, however, that the repo rate will not “need to be raised so much in the coming years.”

For a statement announcing this expected rate rise, it was pretty bearish: 

Sweden is forecast to raise rates next week by 25bp, taking the repo rate to 1 per cent. If this happens, Sweden will have the honour of being the only European serial rate-raiser – an exclusive club spread across the globe, including Israel, Taiwan and Chile. Other rate-raisers have paused. From Citi:

We expect the Riksbank to continue its policy normalization, hiking by another 25bp to 1.0% at the upcoming October 25-26 meeting. Such a move would echo the September conditional interest rate path and also be in line with current market pricing (discounts about a 92% chance of such an outcome)…

We see compelling reasons building, though, for a downgrade of the longer-term part of the Riksbank’s rate path. There is little sign of inflationary pressures building and, combined with an uncertain global economic outlook and lower global interest rate expectations, the Riksbank should be in no hurry to hike, once the policy rate has reached more normal recessionary levels (of around 1.25-1.5%, in our view).

 

Sweden’s central bank raised interest rates for the second time in two months on Thursday, highlighting the strong recovery under way in the Swedish economy as the country’s centre-right government battles for re-election.  

Sweden’s central bank has raised the repo rate 25bp to 0.5 per cent, the first rise since September 2008. The Riksbank cited a strongly performing economy, and the need to raise inflation, currently at 1.2 per cent, towards its target of 2 per cent.

It may be semantic and definitional. It may be highly significant.

Revisions to estimates of Swedish growth in Q3 and Q4 last year show that the country’s economy contracted in both quarters. Both of the revisions are less than a percentage point, and could be within a margin of error. But that would still confirm the fragility of any putative recovery. 

Sweden’s financial regulator needs a bigger budget to cope with its expanding role. The Financial Supervisory Authority is seeking a 10 per cent budget increase per year for three years, on top of its 300m krona ($41m) budget, director-general Martin Andersson told Bloomberg.

Sweden’s banks, which are expected to lose $3.7bn this year from operations in the Baltic countries, might also be facing a housing bubble at home. Record low interest rates have increased mortgage arrangements in spite of rising unemployment. House prices rose 5 per cent in the last quarter, having already passed pre-crisis peaks. 

“It makes little sense to extend the mandate of monetary policy to include financial stability. Flexible inflation targeting, applied in the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis.”

This from the deputy governor of Sweden’s central bank, Lars Svensson, addressing the Mumbai-based central banker conference last week. He observed that using interest rates and targeting inflation were not sufficient to ensure financial stability. But he did not conclude from this that central banks should widen their targets or toolkits. 

Sweden’s central bank is the latest to ask whether financial stability should be added to its list of goals. The Riksbank has proposed a formal review, to include “whether it should be explicitly stated … that the Riksbank has a responsibility for financial stability”.

A similar question was raised at a central banker conference on Friday by India’s central bank governor Dr Duvvuri Subbarao. The significance of the question is great: price stability was previously thought necessary – and perhaps even sufficient – for financial stability. Now there is a growing belief that there might be a trade-off between the two.