Sweden Raises Benchmark Interest Rate for Fourth Time Since July, to 1.25%
Sweden’s central bank raised its benchmark repo rate for a fourth time since July and repeated a forecast for more increases as policy makers try to steer the European Union’s fastest recovery and curb household borrowing.
The Stockholm-based Riksbank raised the seven-day repo rate a quarter of a percentage point to 1.25 percent, it said today on its website. The decision was expected by 17 of 22 economists surveyed by Bloomberg. Five predicted no change.
“The Swedish economy is growing at a record rate,” the bank said in the statement. “The international recovery is continuing, although concern over public finances in Europe has increased.”
Sweden’s gross domestic product surged an annual 6.9 percent last quarter, the fastest pace in at least six years. At the same time, credit growth has hovered around 9 percent all year. Governor Stefan Ingves said he “personally” tracks household indebtedness when deciding rates, in a Nov. 11 speech. The bank said today higher rates are needed to slow borrowing growth and stem the risk of imbalances.
“The hike was a step in the right direction,” said Stefan Mellin, a senior analyst at Danske Bank A/S in Stockholm, in a phone interview. “We do expect hikes at every central bank meeting through the first half of next year.”
GDP Forecast Raised
The Riksbank raised its forecast for economic growth this year to 5.5 percent from 4.8 percent previously. Output will expand 4.4 percent in 2011, versus its earlier forecast for 3.8 percent, the bank estimates. The bank said it left its rate path unchanged, though it now expects the repo rate to average 1.4 percent next quarter, versus an earlier forecast for 1.3 percent.
“One could have expected a slightly bigger increase in the rate path, but the direction was justified given the very strong data we have seen in Sweden recently,” Mellin said.
Sweden’s economic rebound is in contrast to the debt-driven crisis in other parts of Europe, with euro members Greece and Ireland relying on EU bailouts to stay afloat. Spain’s credit rating may be cut from Aa1 by Moody’s Investors Service as investors demand higher bond yields while refinancing needs may stress the country’s markets further, the rating agency said today. Standard & Poor’s yesterday cut the debt outlook for Belgium, which is stuck with a caretaker government six months after inconclusive elections.
The krona was little changed against the euro to trade at 9.0977 at 10:34 a.m. in Stockholm. Against the dollar, the krona lost 0.4 percent to 6.8275.
Credit growth has averaged 8.7 percent over the past two years, while lending to households grew an annual 8.6 percent in October. Headline inflation accelerated to 1.8 percent in November from 1.5 percent the previous month as consumer demand picked up on the back of declining unemployment. The jobless rate fell to 7.5 percent in October from an April high of 9.5 percent.
“Underlying inflationary pressures are still low in Sweden, but are expected to increase as economic activity strengthens,” the bank said. “There is a need to gradually increase the repo rate to stabilize inflation at a level close to the target of 2 percent and to avoid resource utilization becoming too high.”
The bank reiterated its October forecast for the repo rate to average 1.7 percent next year, 2.6 percent in 2012 and 3.3 percent in 2013. Headline inflation will average 2.2 percent in 2011, 2 percent in 2012 and 2.6 percent in 2013. The 2012 inflation forecast is 0.2 point lower than the bank’s October outlook.
Risk of Imbalances
“A gradual rise in the repo rate can also contribute to slower growth in household borrowing and reduce the risk of imbalances building up,” the bank said.
Swedish house prices have risen 18 consecutive months and jumped an annual 5 percent in the three months through October, boosted by credit growth.
“We’ve had signs of pick-up in house prices, which is a concern for the hawkish majority of the Riksbank board,” said Tina Mortensen, an economist at Citigroup Inc. in London, by phone before the rate decision was announced. “We haven’t seen a slowdown in credit growth.”
Norway’s central bank may also focus more on credit risks when deciding rates, said Gizem Kara, an economist at BNP Paribas SA in London, by phone before the decision. The Oslo- based bank announces its rate decision at 2 p.m. local time today. All 19 economists surveyed by Bloomberg expect policy makers to leave the deposit rate at 2 percent for a fifth meeting.
“Sweden is experiencing strong domestic demand and inflation is running higher than expectations,” Kara said. “Economic growth will remain robust over the coming quarters; the Riksbank should keep on increasing rates.”
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