A Third 25-Basis Point Rate Hike in Sweden

October 26, 2010

The Riksbank followed up increases on July 1 and September 2 with a third 25-bp repo rate increase to 1.0% and released a statement that a) revised projected 2010 and 2011 growth higher, b) scaled back projected consumer price inflation in 2011 and 2012, and c) depicted a lower projected repo rate path than shown in July and September.  There were again two dissenting votes on the six-person Executive Board from policymakers who preferred a looser stance.

Sweden is experiencing an enviable combination of rapid domestic demand-led growth but scant inflationary pressure.  GDP growth is now penciled in at 4.8% this year, revised from 4.1%, and 3.8% in 2011, revised from 3.5%.  Growth should average 2.5% per annum in 2012-13.  Slow inflation of 1.4% in the year to September reflects soft unit labor costs, a stronger exchange rate, and the weak global environment.  Core inflation is projected at 1.3% next year, 1.5% in 2012 and 1.9% in 2013.  Total CPI inflation is projected at 1.7% next year and 2.2% in 2011, a downward revision of two-tenths in the first case and three-tenths in the latter.  The central bank’s inflation target is 2.0%, and that’s the inflation forecast for 2013.  Inflation trends upward over time as resource utilization tightens.

The central bank began raising interest rates in mid-2010 as part of a gradual process of normalization.  Augmenting this stance, all three fixed-income cheap loans to banks extended in 2009 havenow been allowed to mature and thus removed from the money market.  Sweden is one of very few central banks that publishes a forecast of its likely future policy moves.  That repo rate path was lowered for the second time in three meetings.  The indicated rate in late 2011 is now 2.0%, down from 2.4%.  The new estimate implies that the repo rate will be increased by a total of 100 basis points next year including one 25-bp hike next quarter.  The latest forecast points to additional rises of the repo rate totaling 100 bps in 2012 and 50 bps in 2013.  The resulting 3.4% rate level late in 2013 would compare to 4.75% prior to 4Q08.  During the recession, which depressed Swedish GDP by 5.1% last year, the repo rate was cut by 275 bps in the fourth quarter of 2008, 100 bps in the fist quarter of 2009, 50 bps in 2Q09 and 25 bps in July 2009.

As at the July and September Executive Board meetings, Deputy Governors Ekholm and Svensson wanted a less restrictive stance than the four-person majority.  Specifically, they proposed keeping the repo rate at 0.75% now and wanted a future repo rate path that would reach 2.7% in 4Q13 instead of the 3.4% level preferred by the majority.  One of their main concerns is that juxtaposed against looser monetary policies in the United States, Japan and elsewhere in Europe, the Executive Board majority’s proposal will result in a further strengthening of the krona and therefore tighter monetary conditions in Sweden than intended or than what would be justified.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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