Sweden's Riksbank Hikes Repo Rate Again, Signals Further Tightening In Months To Come

By: Victoria Marklew | Fri, Oct 27, 2006
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As widely expected, Sweden's Riksbank today hiked its repo rate for the fifth consecutive time this year, taking it up 25bp to 2.75%. The crown slipped after the announcement as Governor Ingves' comments were thought to be less hawkish than expected. However, the governor confirmed that future rate moves will be "roughly in line with recent market expectations." This implies continued 25bp rate hikes at the next five policy meetings (December, February, March, May, and June), putting the repo rate at 4.00% by mid-2007.

The central bank targets underlying inflation (UND1X, ex-indirect taxes and interest rates) of 2.0% over a two-year forecast horizon. Although UND1X remains well below this level - coming in at just 1.0% in September - the Riskbank is concerned with where inflation will be two years from now.

Once again, the Riksbank expressed its concerns over the strength of the housing market, noting that strong increases in borrowing and in prices need to be countered to assure "a calmer adjustment."

Ingves gave the same assessment of the economy as at the last two policy meetings - continued good growth and continued improvement in the labor market - and reiterated the bank's view that keeping inflation at a moderate level will require a gradual increase in interest rates. The bank raised its forecast for 2006 real GDP growth from 3.7% to a more robust 4.3%, and nudged the 2007 forecast up from 2.8% to 3.1%.

Perhaps the only thing that could be interpreted as "less hawkish" was the governor's comment that the economic policy slate of the new center-right government of PM Reinfeldt, which includes tax cuts, is likely to have only a slight effect on inflation. (See September 18 Daily Global Commentary: Sweden: Stock Market and Currency Boosted by Opposition Win, But Interest Rates Will Also Head Higher.) We are somewhat less sanguine on this point, but time will tell. Either way, interest rates will continue to climb in 25bp steps for the next few months.



Victoria Marklew

Author: Victoria Marklew

Victoria Marklew

Victoria Marklew
Vice President and International Economist
The Northern Trust Company
Economic Research Department
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Victoria Marklew is Vice President and International Economist at The Northern Trust Company, Chicago. She joined the Bank in 1991, and works in the Economic Research Department, where she assesses country lending and investment risk, focusing in particular on Asia. Ms. Marklew has a B.A. degree from the University of London, an M.Sc. from the London School of Economics, and a Ph.D. in Political Economy from the University of Pennsylvania. She is the author of Cash, Crisis, and Corporate Governance: The Role of National Financial Systems in Industrial Restructuring (University of Michigan Press, 1995).

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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