Swedish Riksbank Raises Rate a Sixth Time to Cap Inflation

Swedens Riksbank Raises Rate a Sixth Time
The headquarters of the Swedish Central Bank sit in Stockholm. Photographer: Casper Hedberg/Bloomberg

Sweden’s central bank raised its benchmark repo rate for a sixth time since July, and kept a forecast for coming increases unchanged, as it seeks to cap inflation in the European Union’s fastest-growing economy.

The seven-day repo rate was raised a quarter of a percentage point to 1.75 percent, the Stockholm-based Riksbank said today, as was expected by all 28 economists surveyed by Bloomberg. The bank also kept its rate forecast unchanged at an average 2.5 percent in the first quarter of next year and 3.2 percent in the first three months of 2013.

“The Swedish economy is continuing to grow at a good pace and the labor market is improving steadily,” the bank said. “Underlying inflation is still low in Sweden, but is expected to rise as the rate of wage increase accelerates and the spare capacity in the economy declines.”

Sweden’s economy may grow more than twice as fast as the average for the 27-member European Union in 2011, as a second year of recovery pushes down unemployment and fuels consumer spending, the government said last week. The revival has outpaced the central bank’s forecasts and Swedish headline inflation reached 2.9 percent last month, exceeding the 2 percent target for a fourth month.

Inflation Raised

The bank raised its forecast for inflation to 3.2 percent this year from a 2.5 percent prediction in February and its forecast for next year to 2.8 percent from 2.1 percent. Underlying inflation, which adjusts for mortgage costs, is expected at 1.6 percent in 2011 and 1.7 percent in 2012.

The rate forecast implies another three quarter-point increases this year to 2.5 percent, said Michael Grahn, an analyst at Danske Bank A/S in Stockholm.

Nordea Bank AB today said it sees a “clear upside risk” to the rate forecast, in a note to clients. “Many domestic factors, such as increasing resource utilization, upcoming wage round and rising inflation expectations, suggest a tighter policy,” Andreas Jonsson, an economist, said in the note.

The krona rose 0.2 percent against the euro to 8.8992 at 10:23 a.m. in Stockholm. It strengthened 1 percent to 6.1626 against the dollar.

Riksbank Governor Stefan Ingves said in the minutes of the bank’s last meeting he can’t rule out raising rates at all remaining meetings this year, boosting the krona and making it this year’s best-performing major currency against the dollar, the euro and the yen.

Upward Momentum

“The momentum both in the economy and interest rates is clearly upwards and we suspect that the krona will continue to strengthen,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London, in a note.

Sweden’s economy grew 5.5 percent last year and will probably expand 4.6 percent in 2011, 2.3 percent in 2012 and 2.5 percent in 2013, the bank estimates. Unemployment will fall to 7.3 percent this year and 6.7 percent in 2012, from 8.4 percent last year, it said.

Still, underlying inflation has slowed, easing pressure on the bank to pick up the pace of tightening. Deputy Governors Karolina Ekholm and Lars E.O. Svensson today again opposed higher rates and the rate forecast, arguing for slower increases at first and then a rate rising to about 3.9 percent at the end of the forecast period in 2014, higher than the main forecast.

Underlying inflation, or CPIF, was 1.5 percent last month.

Credit Growth

“Such a repo rate path implies CPIF inflation closer to 2 percent and a faster reduction of unemployment toward a longer-run sustainable rate,” they said, according to the Riksbank’s statement.

The bank is also trying to stem credit-market imbalances after property prices exceeded a pre-crisis peak. The rate increases and a cap on mortgage lending have started to work. Lending rose an annual 7.5 percent in February, down from as high as 9 percent last year. Swedish house prices fell 1 percent in the three months through March from the prior quarter, Statistics Sweden said on April 15. Prices rose 3 percent in the year, the office said.

“A gradually increasing repo rate may also help to slow down the growth of household borrowing,” the Riksbank said today.

The economic rebound, driven by an export sector that’s benefited from emerging-market demand, will help the government deliver a budget surplus this year. That’s allowing Prime Minister Fredrik Reinfeldt to plan a sixth round of tax cuts at a time when other European governments are slashing costs to counter deficits.

The largest Nordic economy will expand 4.6 percent this year, compared with the 4.8 percent predicted last month, the government said last week. Output will grow 3.8 percent in 2012 and 3.6 percent in 2013, it estimates, raising March forecasts.

The government’s outlook assumes the central bank’s benchmark rate will average 2.25 percent this year, 3.25 percent next year and 3.75 percent in 2013.

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