Sweden’s Central Bank, Riksbank on Tuesday hiked its benchmark rate by an unprecedented 100 bps to 1.75 percent in September of 2022. The bank was expected to raise the repo rate by 75 bps to 1.50% with upside risk to that magnitude. The 100 basis-point hike made Sweden only the second in 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. Riksbank was the first of three days of central-bank decisions with multiple interest-rate hikes on their way.
Inflation is too high. It is undermining households’ purchasing power and making it more difficult for both companies and households to plan their finances. Monetary policy now needs to be tightened further to bring inflation back to the target. The Executive Board has therefore decided to raise the policy rate by 1 percentage point to 1.75 per cent. The forecast for the policy rate is that it will continue to be raised in the coming six months. The development of inflation going forward is still difficult to assess and the Riksbank will adapt monetary policy as necessary to ensure that inflation is brought back to the target.
Riksbank has become increasingly more hawkish after red-hot, 30-yr high inflation at 9.8% y/y, SEK depreciation, and the fear of falling behind the ECB as they aggressively tighten rates.
Governor Stefan Ingves conceded earlier this month 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 He also said that previous guidance for a half-point hike this week is no longer valid.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 approaches 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, September 2022
Inflation has risen rapidly and is high both in Sweden and abroad. Several factors connected to the pandemic and Russia’s war in Ukraine has contributed to this development. Recently, electricity and gas prices in particular have risen to very high levels in Europe. The rapid price increases undermine households’ purchasing power and make it difficult for both companies and households to plan their finances. To bring down the high rate of price increases, central banks worldwide have raised their policy rates at a rapid pace.
That consumer prices in Sweden have become so high is due not only to effects from abroad but also to good economic activity in Sweden. The combination of substantial international cost increases, effects of high energy prices on other prices and relatively strong Swedish economic activity has meant that CPIF inflation rose to 9.0 per cent in August. This is the highest level since 1991, and higher than in the Riksbanks’ assessement in June. The risk is still large that inflation becomes entrenched and it is extremely important that monetary policy acts to ensure that inflation falls back and stabilises around the target of 2 per cent within a reasonable time perspective.
The Executive Board assesses that monetary policy now needs to act more than was anticipated in June to bring inflation back to the target. The Executive Board has therefore decided to raise the Riksbank’s policy rate by 1 percentage point to 1.75 per cent. The forecast indicates that the policy rate will be raised further over the coming six months. The development of inflation going forward is still uncertain and the Riksbank will adapt monetary policy as necessary to ensure that inflation is brought back to the target within a reasonable time perspective. Rising prices and higher interest costs are being felt by households and companies. However, it would be even more painful for the Swedish economy if inflation were to remain at the current high levels. By raising the policy rate more now, the risk of high inflation in the longer term is reduced and thereby the need for an even greater monetary tightening further ahead.
Central Bank Action Ahead
Source: Scotiabank, Bloomberg, TC, Riksbank
From The TradersCommunity Research Desk