Sweden’s Riksbank Raises Main Rate to 2%

Sweden’s central bank raised its benchmark repurchase rate for the seventh time in a year and repeated a pledge to continue tightening policy as the country’s economic expansion withstands Europe’s debt crisis.

Policy makers raised the seven-day rate a quarter of a percentage point to 2 percent, the Stockholm-based Riksbank said today said in a statement. The move was expected by all 18 economists surveyed by Bloomberg. The bank maintained its outlook for the pace of continued rate increases.

“The Swedish economy is growing at a good rate, although international developments are marked by uncertainty,” the bank said in a statement. “Consumer price inflation is high at present as a result of rising mortgage rates. Underlying inflationary pressures remain low, but are expected to increase as economic activity strengthens.”

The largest Nordic economy expanded at the fastest pace in the European Union last year, helping to push headline inflation to 3.3 percent in May and to exceed the bank’s 2 percent target for a sixth consecutive month. The economic rebound, spurred by a surge in exports, has sent unemployment lower and may encourage an acceleration in wage growth, Deputy Governor Svante Oeberg said on June 16. The jobless rate was 7.9 percent in May, compared with a 9.8 percent peak in June 2009.

Krona Gains

“They still project two more increases this year and the path after that is completely unchanged,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, by phone. “They’re doing the right thing. The normalization of the rate is good. Low rates over a long period of time will hurt the economy.”

The krona traded 0.4 percent higher at 9.0665 at 9:52 a.m. in Stockholm. Against the dollar, the krona was little changed at 6.2585.

“We are still expecting the krona to continue to strengthen against the euro, but at a slower pace,” said Carl Hammer, chief foreign-exchange strategist at Stockholm-based SEB AB. The bank targets 8.90 to the euro by September, he said.

“The Swedish economy is stable despite increased uncertainty globally,” the bank said.

The repo rate will reach an average 2.3 percent in the fourth quarter, 2.9 percent in the third quarter of 2012, and 3.4 percent in the same period of 2013, it said today. The economy will expand 4.4 percent this year after last year’s 5.7 percent rebound, the bank said. Growth will slow to 2.2 percent in 2012 and reach 2.5 percent in 2013, it said.

Reservations Entered

Deputy Governors Karolina Ekholm and Lars E.O. Svensson entered reservations against the decision to raise rates. They also argued in favor of a lower rate path, the bank said. The bank comprises six board members, including Governor Stefan Ingves.

Headline inflation will exceed the bank’s target through 2013, it said. Consumer price growth adjusting for the impact of mortgage costs will be 1.6 percent this year, 1.7 percent in 2012 and reach 2.1 percent in 2013, the bank estimates.

“The labour market situation is also continuing to develop positively, which means that the rate of wage increase is rising,” the bank said.

Inflation by that gauge slowed to 1.7 percent in May from 1.8 percent in April, Statistics Sweden said on June 14.

‘Simply Too Low’

“Sweden’s economy is doing very well and the rate is simply too low given the economic outlook,” Jussi Hiljanen, chief rate analyst at SEB AB in Stockholm, said before the decision. “The labor market has developed better than expected” and “households’ inflation expectations have increased quite a bit.”

Sweden on April 13 raised its economic growth forecast for 2012 and 2013, when it sees 3.8 percent and 3.6 percent growth respectively. Prime Minister Fredrik Reinfeldt’s government, which won a second four-year term in September, plans to reduce taxes for a sixth consecutive year in 2012 while Finance Minister Anders Borg on June 22 said he’s prepared to stimulate the economy further if the European debt crisis dents demand.

Households’ expectations for consumer price increases over the next 12 months rose to 3.3 percent in June from 3.1 percent previously, according to a survey by the National Institute of Economic Research. Expectations of more rate rises this year have sent Sweden’s krona 22 percent higher against the dollar and 6 percent against the euro in the past year. The currency is only “starting to approach” a fair value, Riksbank Deputy Governor Lars Nyberg said in a June interview.

Exports Resilient

The currency’s surge has yet to suppress export demand.

Sweden’s SKF AB (SKFB), the world’s largest maker of ball bearings, reported record quarterly profit at the start of 2011 as sales to all regions grew. Volvo AB (VOLVB) and Scania AB (SCVB), two of Europe’s biggest commercial-vehicle makers, also said profits surged as heavy-truck demand rebounded. Sweden has weathered Europe’s debt crisis as exporters shift focus to emerging markets. About 44 percent of its exports went to countries outside the EU in May, the statistics office said on June 27.

Germany’s economic expansion helped growth in the euro region accelerate at the fastest pace in almost a year in the first quarter, as demand in the largest euro-area economy offset austerity measures from Ireland to Spain.

The Riksbank’s rate increases and the introduction of a cap on the size of mortgage loans have also cooled credit growth after property prices exceeded pre-crisis levels. Household borrowing slowed to an annual 6.9 percent in May, the lowest level in at least eight years.

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

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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