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Sweden Raises Benchmark Rate to 0.75% Amid Recovery

Sweden’s central bank raised its benchmark lending rate for a second time since July as policy makers try to steer the largest Nordic economy through the European Union’s biggest rebound.

The world’s oldest central bank raised the repo rate by a quarter of a percentage point to 0.75 percent, it said today on its website. The decision was expected by 16 of the 21 economists surveyed by Bloomberg. Five had predicted no change.

“The Swedish economy is looking better now than it did in July,” Governor Stefan Ingves said at a press conference today in Stockholm. “More rate increases will follow for quite a while.” Domestic consumption “looks very stable” and exports are increasing “very strongly.”

Sweden’s $418 billion economy is poised to grow 4.5 percent this year, the government estimates, as an export- and investment-led recovery recoups most of last year’s 5.1 percent contraction. The Riksbank is moving ahead with tightening plans even as the outlook for other parts of Europe and the U.S. grows less certain and as Sweden’s inflationary pressure remains subdued. The bank said the decision to raise rates was in part driven by concern Sweden’s housing market may overheat.

“The Swedish economy is strong across the board,” said Annika Winsth, chief economist at Nordea Bank AB, the Nordic region’s largest lender. “The export industry took a beating during the financial crisis but households, the service and public sectors remained strong throughout. The global recovery has meant that the export sector has now joined the fray.”

Photographer: Casper Hedberg/Bloomberg

A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on Nov. 18, 2008. Close

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Photographer: Casper Hedberg/Bloomberg

A flag of the Swedish Central Bank flies from a flagpole outside the building in Stockholm on Nov. 18, 2008.

Board Divisions

Today’s rate decision was backed by five of the bank’s six board members, while Deputy Governor Lars E. O. Svensson had wanted to keep rates unchanged and entered a reservation against the rate path. Deputy Governor Karolina Ekholm also wanted a lower rate path, according to the statement.

The krona traded 0.3 percent higher against the euro at 9.3143 at 12:00 p.m. in Stockholm. Against the dollar, the krona traded 0.4 percent higher at 7.2584.

“With the fiscal problems in the euro-zone periphery here to stay and ECB rates set to remain on hold until beyond 2012, the krona may continue to rise against the euro,” Ben May, an economist at Capital Economics, said in a client note.

The Riksbank kept its repo rate forecast unchanged at an average 0.9 percent in the last quarter of this year, 2.1 percent in the third quarter of 2011 and 3.1 percent in the same quarter of 2012.

Raised Growth Forecast

“It’s right to raise the rate today and we estimate and believe that the Riksbank should raise it also in October and December” to 1.25 percent by the end of the year, Winsth said.

The Riksbank raised its prediction for economic growth this year to 4.1 percent from 3.8 percent previously, while lowering the estimate to 3.5 percent from 3.6 percent for next year and to 2.6 percent from 2.8 percent for 2012.

“Continuing modest activity in the eurozone and a more protracted recovery in the United States are expected to dampen developments in Sweden somewhat in the long run,” it said in a statement.

Consumer prices will increase 1.1 this year, 1.9 percent in 2011 and 2.5 percent in 2012. Unemployment will peak at an average 8.5 percent this year, before falling to 7.9 percent in 2011 and 7.6 percent in 2012, the bank predicted.

Inflation will accelerate going forward since wage increases will be “significantly higher” in 2011 than this year because of a lack of qualified labor, while energy and raw material prices will also rise, Winsth said.

Inflation

The government of Prime Minister Fredrik Reinfeldt, which faces general elections in less than three weeks, on Aug. 20 raised Sweden’s economic growth outlook for the second time in 1 1/2 months. The government, which is leading in polls ahead of the Sept. 19 vote, boasts the EU’s smallest budget deficit even after four years of tax cuts. That’s stimulated the economy and helped revive the labor market.

Volvo AB, the world’s second largest truck maker, on Aug. 24 said it’s hiring more people in Sweden after shedding thousands of jobs to adapt to lower demand during the financial crisis. Scania AB, the Swedish truckmaker controlled by Volkswagen AG, on Aug. 23 said it will hire more staff in Sweden to help increase production as demand in its truck markets grows.

“Our situation has strengthened. Sweden belongs to the frontrunners in Europe,” Finance Minister Anders Borg said on Aug. 20. The Riksbank has signaled it’s also using policy to steer the housing market after the National Housing Credit Guarantee Board said the country was already in the grip of a bubble.

Housing Market

House prices jumped an annual 7 percent in the three months through July, the 15th consecutive period of increases, according to the statistics office. About 60 percent of mortgages in Sweden are based on adjustable-rate loans, meaning low rates were quick to filter through to households.

Still, the inflation outlook may be too subdued to support the Riksbank’s tightening ambitions.

“We will have very low inflation pressure during all of 2011 and 2012,” said Mats Dillen, director general at the National Institute of Economic Research, in an interview yesterday. “We still have a weak labor market, we’re facing very low wage increases. On top of that, we think the krona will strengthen and a pretty weak world economy means that imported inflation won’t be very high.”

Headline inflation, which has lagged behind the bank’s target since December 2008, was 1.1 percent in July. Consumer prices, adjusted for mortgage payments, increased an annual 1.7 percent. The krona is the second-best performer against the dollar since the end of June of the 16 major currencies tracked by Bloomberg in the period.

Rebound

Gross domestic product expanded an annual 3.7 percent in the second quarter after industrial production rose an annual 12 percent in June. Seasonally adjusted unemployment fell to 8.1 percent in June, from 8.7 percent the previous month.

If it wins the election, the government will spend about 13 billion kronor ($1.8 billion) next year, or 0.4 of GDP, Borg said on Aug. 26. It spent 1.2 percent of GDP this year to spur growth.

Sweden and neighboring Norway are among 18 countries that have increased interest rates since the height of the global financial crisis.

“Since Norges Bank began to raise interest rates late last year, Norway’s own buoyant household spending recovery has stopped almost dead in its tracks. Accordingly, there is a risk that something similar might take place in Sweden too,” May at Capital Economics said.

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.

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