EconomySweden’s Riksbank raises rates in policy U-turn

Sweden’s Riksbank raises rates in policy U-turn


Sweden’s central bank performed a dramatic U-turn on Thursday as it raised interest rates, said it would shrink its balance sheet and warned of more increases to come as it belatedly responded to surging inflation.

The Riksbank reversed the stance it had adopted at its previous meeting in February, when it said it would only lift interest rates from zero towards the end of 2024. On Thursday, the bank raised its main repurchase rate to 0.25 per cent and forecast that rates were likely to reach 1 per cent by the end of the year.

Sweden’s central bank has been surprised by the strength of inflation, but it forecast prices would increase 5.5 per cent this year, well above its previous forecast of 2.9 per cent and its target of 2 per cent.

“Inflation has risen to the highest level since the 1990s and will be high for some time. To counteract the high inflation from becoming entrenched in price and wage-setting, the executive board has decided to raise the repo rate,” the Riksbank said in a statement.

The central bank has long struggled with its inflation mandate, raising rates in 2010 only to have to cut them to below zero afterwards, a move often cited as a cautionary tale against monetary tightening by the US Federal Reserve.

It then followed with a five-year experiment with negative rates, ending only in December 2019 after parts of the financial industry complained that it was hitting profits.

Coming out of the Covid-19 pandemic and with the addition of energy and food price shocks from Russia’s invasion of Ukraine, the Riksbank stood out with its call in February to keep rates at zero for years to come even as other central banks tightened policy. It has now joined the global consensus in tightening policy to counteract rising inflation.

The Swedish central bank warned that it was “more uncertain than usual” about how inflation would behave in the coming months and added that “the risk outlook . . . is on the upside”, meaning rates could be higher than forecast.

“The Riksbank finally bowed to economic logic . . . and today’s announcement completes a remarkable U-turn from the bank’s thus-far decidedly dovish stance,” said David Oxley, senior Europe economist at Capital Economics.

The Riksbank also said that it would slow the pace of its asset purchases in the second half of the year, meaning its balance sheet would start to shrink. It will buy SKr37bn ($3.6bn) of bonds in the second half of the year, half the level of the first six months.

Sweden’s growth is expected to slow considerably at the same time that inflation rises, with gross domestic product now forecast at 2.8 per cent for this year and 1.4 per cent for 2023, both lower than February’s forecasts of 3.6 and 2 per cent, respectively.



Original Source Link

Latest News

Will Trump be good for business? It’s illuminating to remember how his last term played out

“Steel Stocks Put the Pedal to the Metal” the Wall Street Journal declared within hours of Donald Trump’s...

Norway supports MiCA, considers CBDC for financial stability

Norges Bank backs the EU’s MiCA regulation while considering a CBDC to enhance cross-border payments and support financial...

Donald Trump asks arch protectionist Robert Lighthizer to run US trade policy

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington...

Taylor Swift Fans Are Leaving X for Bluesky After Trump’s Election

Following the US presidential election, Swifties, the name for Taylor Swift’s fans, are fleeing X for Bluesky. X’s...

Australian Prime Minister Proposes Total Social Media Ban for Anyone Under 16

Australian Prime Minister Anthony Albanese has announced plans to ban social media for all Australians under the age...

Must Read

- Advertisement -

You might also likeRELATED
Recommended to you