Economy

Swedish central bank raises policy rate to 2.5%, will keep hiking


FILE PHOTO: A view of an entrance to Sweden’s central bank in Stockholm, Sweden, August 12, 2016. REUTERS/Violette Goarant

STOCKHOLM (Reuters) -Sweden’s central bank raised its key rate by three-quarters of a percentage point on Thursday to 2.5% and signalled it would tighten policy further next year to fight surging inflation.

At the most recent meeting in September, the Riksbank outlined a 50 basis points hike in November and a further tightening of monetary policy early next year, with interest rates peaking around 2.5%.

But core inflation jumped by more than the Riksbank – and markets – had expected in October, hitting 7.9% and forcing the Riksbank to take a more aggressive approach.

“The risk…the current high inflation will become entrenched is still substantial, and it is very important that monetary policy acts to ensure inflation falls back and stabilises around the target of 2 percent within a reasonable time,” the central bank said in a statement.

“The forecast shows that the policy rate will probably be raised further at the beginning of next year and then be just below 3 per cent.”

Analysts in a Reuters poll had forecast a 75 basis point hike and that the central bank would raise its rate-path forecast. The Swedish crown was broadly unchanged after the announcement.

There is little the Riksbank can do about current inflation, but it wants to head off the risk that surging prices will spill over into higher wages in a self-reinforcing spiral.

At the same time, the economy is expected to contract next year. Mortgage costs have risen, house prices are sliding and many households are already struggling with a cost-of-living crisis.

More rate hikes will increase the short-term pain, though the central bank argues that by acting now, it reduces the risks that rates will have to go even higher at a later date.

Uncertainty is high, however.

In the United States, the Federal Reserve may soon scale back the pace of its interest rate rises after four consecutive 75 basis point increases.

In Europe, some rate-setters at the European Central Bank argue there is a risk of inflation becoming entrenched. Others are worried aggressive hikes will mostly serve to worsen the downturn that all expect.

With the Riksbank fretting that a weak crown currency may drive up imported inflation even further, the ECB’s decisions are likely to weigh heavily on Swedish rate-setters.

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