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Riksbank Raises Main Rate to 2% as Price Pressure Gains

Riksbank Raises Main Rate to 2% as Price Pressure Gains
The headquarters of the Swedish Central Bank, right, sit in Stockholm, Sweden. Photographer: Casper Hedberg/Bloomberg

July 5 (Bloomberg) -- 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 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.

“We forecast a stable development of the Swedish economy during the next few years,” Governor Stefan Ingves said at a press conference in Stockholm. “The pace of inflation is gradually rising and to meet our inflation target of 2 percent we need to raise the rate.”

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 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,” Roger Josefsson, chief economist at Danske Bank A/S in Stockholm, said 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 was 0.3 percent higher against the euro at 9.0751 at 2:44 p.m. in Stockholm. Against the dollar, the krona weakened 0.2 percent to 6.2707.

“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 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, the bank said. 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.

Global Growth

“Global growth during the next few years will be at a decent level at slightly more than 4 percent and that’s of course important to an export-dependent country like Sweden,” Ingves said.

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.

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

“We forecast a continued improvement in the labor market,” Ingves said. “The pace of wage increases is picking up” to around a historic average, he said.

Unemployment

Unemployment will fall to an average 7.4 percent this year and 6.7 percent in 2012, the Riksbank forecast today.

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 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 significant strengthening of the exchange rate is behind us,” Ingves said today.

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

Exports Surge

Sweden’s SKF AB, 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 and Scania AB, 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 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.

Deputy Governors Karolina Ekholm and Lars E.O. Svensson entered reservations against the decision to raise rates and argued for a slower increase in rates. The bank has six board members.

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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