A Fourth Rate Hike in Sweden
December 15, 2010
A fourth 25-basis point repo rate hike to 1.25% was announced by the Riksbank and will become effective a week from today. Minutes of this week’s Executive Board meeting, where policymakers again split 4-2 in favor of the rate increase, will be published January 3rd. Earlier tightenings of 25 basis points each followed meetings on July 1, September 2nd and October 25. The context for today’s action was very rapid economic recovery that saw real GDP climb 6.9% between the third quarter of 2009 and third quarter of 2010. GDP had plunged 5.3% in 2009. CPI inflation remains well-contained at 1.8%, helped by a buoyant krona, and is expected to decline next year and in 2012 before rising back toward the 2% target in 2013.
A statement from officials revised projected economic growth in 2011 to 4.4% from 3.8% assumed at the late October policy meeting and 3.5% assumed in early September, but the indicated likely future climb of the repo rate was not changed. It calls for an average repo rate level of 1.4% next quarter, 2.0% in the final quarter of 2011, 2.9% in 4Q12 and 3.4% in the final quarter of 2013. The ongoing series of rate increases is being portrayed as a process of normalization meant to stabilize inflation in the medium term near its target and to prevent an excessive level of resource usage from developing. Household credit also needs to be constrained. At 1.25%, the repo rate remains 350 basis points below the 2008 peak level. Growth is broadly based and spilling over into a healthier labor market.
As at the October meeting, two of the six Executive Board members dissented from today’s decision, Ekholm and Svensson, who each preferred keeping the repo rate at 1.0% and raising such gradually to 2.7% by 4Q13, not 3.4% as favored by the majority of the committee.
Copyright 2010 Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Riksbank