Sweden’s Riksbank to hike rates by half percentage-point on Thursday

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Economists were almost unanimous in seeing a rise to 3.0% at Thursday’s policy meeting, pointing to both inflation at its highest level in 30 years and the need to keep pace with the European Central Bank , which raised its key rate by 50 basis points last week.

The median forecast is then for one more hike in April before rates start to fall in early 2024, although analysts were almost evenly split on whether the peak would be 3.0% or 3.25%.

Sweden’s economy is expected to shrink this year, while the high proportion of variable rate mortgages in Sweden means that interest rate rises have a faster and greater impact than in -most of the rest of Europe.

“We think inflationary pressures will ease sooner in Sweden than elsewhere,” Capital Economics said. “With this in mind, we are targeting the first rate cut in January 2024.”

House prices have already fallen around 15% as a result of consecutive increases by the Riksbank last year, which took the policy rate to 2.5% from zero in early 2022.

Consumers have cut back on spending, and housing investment is expected to slow. GDP is expected to decline by up to 2% this year, similar to the decline during the COVID-19 pandemic.

Still, upside risks remain.

The ECB has promised another 50 basis point hike in March and some rate setters have said the ECB won’t stop there.

Sweden’s krona is trading around levels last seen during the global financial crisis in the years after 2008, and if it doesn’t follow in the ECB’s footsteps it will continue to undermine the currency.

Rate setters also remain concerned that inflation may become entrenched. Three analysts saw the benchmark rate rising to 3.50%.

“Inflation continued to rise and the Riksbank will need to further tighten monetary policy before it reaches the peak of the interest rate, which we estimate will be 3.50%,” said the DNB banking group.

The meeting is the first under the leadership of the new Riksbank governor Erik Thedeen, with Deputy Governor Aino Bunge also voting for the first time.

(Reporting by Simon Johnson; Editing by Kevin Liffey)

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