Sweden raises interest rates by one percentage point with more to come

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  • Riksbank policy rate now at 1.75%
  • Greatest hike since 1992
  • The policy rate should peak in the second quarter of 2023 at 2.5%

STOCKHOLM, Sept 20 (Reuters) – Sweden’s central bank on Tuesday raised interest rates a full percentage point higher than expected to 1.75% and warned of more to come in the coming months. next six months as it seeks to rein in soaring inflation.

Inflation hit 9% – a 30-year high – in August as the effects of soaring energy prices rippled through the economy and exceeded Riksbank forecasts. Read more

The rate hike was the largest since the adoption of the inflation target in 1993, equivalent to the full one percentage point hike of November 1992 during Sweden’s domestic financial crisis, when the main rate reached 500% for a short time.

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“When rates go up, obviously interest costs go up for many households, but the costs of high inflation – persistently high inflation – are actually even higher,” Governor Stefan Ingves told reporters.

“By raising rates now and continuing to raise rates, we reduce the risk that inflation will park high.”

A majority of analysts in a Reuters poll had forecast a 75 basis point rise on Tuesday, with just two expecting a full percentage point.

The Swedish krona was stable after initially rising on the rate announcement.

The central bank cannot do much about the current level of inflation. But rate setters don’t want soaring prices to spill over into higher wage demands, which would make the job of getting back to the 2% inflation target that much harder in the long run.

Rate hikes will continue despite forecasts The Swedish economy is heading for a sharp slowdown – possibly even a recession.

The Riksbank expects GDP to shrink by 0.7% next year.

Rate setters now see the policy rate peaking at around 2.5% in the second quarter of next year, rather than the 2% peak early next year seen in June.

“We… believe the policy rate will be higher than that and we’re not ruling out a 3.5% peak at the end of 2023,” said Lars Kristian Feste, head of fixed income at Ohman Group.

“The reason for this is that inflation is not going to come down as fast as the Riksbank’s forecast of around 2.0% in 2024.”

The markets are also seeing the key rate peak around 3.5%.

Sweden’s economic slowdown creates an immediate challenge for the new government, which is expected to be formed by a right-wing four-party bloc that won most seats in a national election earlier this month. Read more

Tax cuts are likely on the agenda, although Governor Ingves has said fiscal policy would be better focused on structural reform than maintaining demand.

Other central banks should also continue to tighten monetary policy.

Earlier this month, the European Central Bank raised its key rate by 75 basis points, following two such hikes by the US Federal Reserve. Read more

Analysts are betting there will be no slackening in the pace of Fed and ECB hikes, while other central banks, such as the Swiss National Bank, are expected to follow suit with aggressive hikes. Read more

The United States, Britain, Norway, Switzerland and Japan all have monetary policy meetings this week.

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Reporting from Stockholm Newsroom; edited by Niklas Pollard and Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

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