Swedish Central Bank Raises Rate, Signals Faster Tightening

Tuesday, 15 Feb 2011 07:41 AM

 

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Sweden's central bank raised its key repo rate by a quarter point on Tuesday and forecast slightly faster hikes ahead to keep inflation within target and brake a potentially dangerous build up in household debt.

Sweden's economy, recovering from a 2009 recession which was its worst downturn since World War Two, is now one of the fastest growing in Europe and the central bank has raised rates at five meetings in a row.

But the forecast for a slightly faster pace of monetary tightening was less aggressive than expected by investors and the Swedish crown eased off its highs. The currency has soared against the euro due to the strong economic growth and the fact European Central Bank rates held at a record low 1.0 percent.

"The assessment is also that the repo rate needs to be raised somewhat faster in the coming period," the bank said after raising the repo rate to 1.50 percent from 1.25 in a widely expected decision.

"To stabilize inflation close to the target of 2 percent and to avoid resource utilization being too high, the repo rate needs to gradually increase," the Riksbank said in a statement.

It said it also wanted to head off a housing bubble.

"Household debts have increased substantially in recent years. If these debts continue to increase at a much faster rate than incomes over a long period of time, there is a risk that imbalances will build up in the Swedish economy," it said.

"A gradually increasing repo rate may help to slow down the growth of household borrowing," it added.

Economists said the forward-looking comments were a bit milder than expected.

"As expected they hiked of course, and they are also raising the path, but they are doing it a bit more cautiously than expected," said SEB analyst Elisabet Kopelman.

"It is a pretty soft path," she said.

Others said the central bank might eventually have to soften its stance.

Data released at the same time as the rate decision on capacity utilization in industry showed a rise of just 0.2 percentage points in the fourth quarter, the slowest quarterly rise in a year and a half.

"I still think they are too hawkish, that they may have to retreat from that later this year," said RBS analyst Par Magnusson, citing the rise of the crown and the fact that mortgage rates have already risen more than the repo rate.

The Swedish crown initially rose after the central bank rate decision to 8.7350 to the euro, but by 0910 GMT it had eased back to be flat at 8.7595.

The bank kept its forecasts for Swedish growth this year at 4.4 percent after an expected 5.5 percent in 2010, which it said was a higher pace than economies in the euro zone.

All 18 analysts in a Reuters poll had forecast the quarter-point hike and all but three expected another rate rise at the bank's next meeting in April.

As at earlier meetings, two of the six central bank's governors disagreed with the decision to raise the repo rate and wanted a slower path for rate rises.

Sweden's rapidly recovering economy grew 6.9 percent year-on-year in the third quarter of 2010 and its inflation rate hit 2.3 percent in December.

© 2014 Thomson/Reuters. All rights reserved.

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