Sweden’s central bank raised its benchmark rate at a sharper-than-expected pace on Tuesday and signaled more hikes to combat high inflation.
The Executive Board of Riksbank decided to raise the policy rate by 1 percentage point to 1.75 percent and signaled more tightening in the coming six months.
This was the biggest rate hike in three decades. Markets had forecast a 75 basis-point rate increase.
The board said the monetary policy needs to be tightened more than anticipated earlier to bring inflation back to the target. The forecast indicated that the policy rate will be raised further in the coming six months.
Policymakers vowed to adjust monetary policy in a manner necessary to bring the inflation back to the target within a reasonable time perspective.
The Riksbank said asset purchases will continue in accordance with the decision in June, but are expected to cease at the end of the year.
The board observed that rising prices and higher interest costs are felt by households and businesses. However, the board said it would be even more painful for the economy if inflation remained at the current high levels.
“By raising the policy rate more now, the risk of high inflation in the longer term is reduced, and thereby the need for greater monetary policy tightening further ahead,” the bank said.
Riksbank raised its inflation projection for this year to 8.6 percent from 7.6 percent. Likewise, the forecast for next year was lifted to 8.5 percent and that for 2024 to 2.2 percent.
At the same time, the economic growth outlook for the forecast period was lowered. The economy is expected to grow 2.7 percent this year instead of 1.8 percent estimated previously.
The bank forecast the economy to shrink 0.7 percent next year before expanding 1.1 percent in 2024.
It is clear that further rate decisions will heavily rely on the energy story and the European economic outlook, ING economist Francesco Pesole said.
Despite the sharp rate hike, the Swedish krona’s reaction was negative as monetary policy keeps proving a secondary FX driver and the Riksbank’s reserve build-up remains under scrutiny amid a generalized bad environment for high-beta European currencies, the economist added.
The announcement came before the Federal Open Market Committee of the U.S. Federal Reserve begins its meeting on Tuesday. Most of the economists see a rate hike of 75 basis points.
The monetary policy announcements from the Bank of England, Swiss National Bank and the Norges Bank are also due this week. All major central banks are expected to tighten their policies in the face of runaway inflation.
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