Sweden’s Riksbank Raise Rates by 75 bps to the Highest Level Since December 2008

Sweden’s Central Bank, Riksbank on Thursday hiked its benchmark rate by 75bps to 2.5 percent during its November meeting. The move followed the unprecedented 100 bps to 1.75 percent in September of 2022. Borrowing costs in Sweden are now at the highest level since December 2008, in an attempt to bring down inflation. CPIF inflation was 9.3 percent in October, well above the central bank’s target of 2 percent. Looking ahead, the policy rate is expected to be raised further at the beginning of next year to then be just under 3 percent.

Illustration: David Simonds/Observer

Inflation is still far too high. High inflation erodes many people’s purchasing power and makes it more difficult for households and businesses to plan their finances. In order to bring down inflation and safeguard the inflation target, the Executive Board has decided to raise the key interest rate by 0.75 percentage points to 2.5 per cent. The forecast shows that the policy rate is likely to be raised further at the beginning of next year to then be just under 3 percent. Inflation developments remain difficult to assess and the Riksbank will adjust monetary policy in the way necessary to ensure that inflation is returned to its target within a reasonable period of time.

Sweden Interest Rate

Riksbank became increasingly more hawkish after red-hot, 30-yr high inflation at 9.8% y/y in August, still at 9.3% in October. SEK depreciation, and the fear of falling behind the ECB as they aggressively tighten rates are impacting the decisions also.

Governor Stefan Ingves conceded in September that after underestimating inflation, small increments in rate hikes may not suffice. He also said that previous guidance for a half-point hike this week is no longer valid. The bank signaled that the rate would continue to rise for the next six months.  The decision followed two consecutive rate increases at lower magnitudes, made to fight inflation that currently stands at an over 30-year high and to support a krona that approached its record low hit in 2001.

Inflation is the Issue

Riksbank policymakers noted that higher price growth is undermining consumers’ and households’ purchasing power and hampers the ability to plan finances. The forecast for the year-end benchmark rate was revised higher to be close to 2.25 percent. At the same time, inflation is expected to average 8.6 percent during this year and 8.5 percent in 2023, both revised sharply upwards. Within current projections, inflation is expected to normalize at the 2 percent level by 2025.

Riksbank Monetary Policy Report, November 2022

In order to bring down inflation and safeguard its inflation target, the Executive Board has decided to raise the Rishank’s key interest rate by 0.75 percentage points to 2.5 per cent.

Inflation is still far too high. In October, CPIF inflation stood at 9.3 per cent. Although this was slightly below the Riksbank’s forecast in September, this is entirely explained by the fact that energy prices were lower than expected. Apart from them, inflation has instead become unexpectedly high. There is still a great risk that today’s high inflation will settle in the expectations of, among others, households, companies and players in the financial markets. High inflation for a long time can create serious problems. Therefore, monetary policy needs to act so that inflation can fall back and stabilise around the 2% target within a reasonable period of time. The Executive Board thus believes that the key interest rate needs to be raised more than the assessment in September.

The Riksbank needs to cool off the economy for inflation to return to its target. It is true that rising prices and higher interest costs are felt by households and businesses. However, it would be even more noticeable for the Swedish economy if inflation remained at today’s high level. By raising its key interest rate more now, the Riksbank can reduce the risk that inflation will remain high for a long time. This also reduces the risk of even greater monetary policy tightening later on. With this monetary policy, inflation is expected to fall back next year and stabilise close to 2% in 2024.

The forecast shows that the policy rate is likely to be raised further at the beginning of next year and then be just below 3 percent. However, inflation developments remain difficult to assess and the Riksbank will adjust monetary policy in the way necessary to ensure that inflation is returned to its target within a reasonable period of time.


Source: Bloomberg, TC, Riksbank

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