Sweden braces for biggest rate hike of this century

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(Bloomberg) – The Riksbank will lead the global charge against inflation this week with an aggressive interest rate hike that will likely be the largest in nearly three decades since Sweden’s central bank introduced its current policy.

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While most economists believe the Stockholm-based central bank will follow the European Central Bank and offer a 75 basis point hike, many say a bigger move can’t be ruled out. Either option would represent the biggest increase since the Riksbank’s current policy regime, with a 2% inflation target, was established in the 1990s.

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A 100 basis point hike would make Sweden the second in the group of 10 jurisdictions with the world’s most traded currencies to make such a move this year – after the Bank of Canada in July. It could also set the tone for a bumper week of policymaking, with some investors speculating the US Federal Reserve could do the same on Wednesday.

Either way, a sharp rise in the Riksbank will demonstrate heightened concerns about inflation that officials have been slow to grasp and react to in the Nordic region’s largest economy. At 9%, it is at its highest level in three decades and has exceeded central bank forecasts for 11 consecutive months.

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Governor Stefan Ingves conceded earlier this month that after underestimating inflation, small rate hikes may not be enough. He also said that previous forecasts for a half-point rise this week no longer hold.

The Riksbank faces a dilemma familiar to its global peers, how to rein in inflation without hurting the economy too much. This is particularly acute in Sweden, where household indebtedness is high and more than 40% of mortgages have rates fixed for periods not exceeding three months.

The U-turn in monetary policy has already dented a previously booming housing market, with house prices falling steadily after peaking earlier this year.

What Bloomberg Economics says…

Our forecast places the Riksbank’s key rate at 2.25% at the end of the year. Uncertain energy prices and rising utility costs – particularly for southern Sweden, where electricity prices nearly tripled during August – pose risks to the upside for these prospects.

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—Selva Bahar Baziki, Swedish and Turkish economist. To read the full report, click here

Although the risk of a full percentage point hike has increased, it could be a step too far for Ingves and his colleagues, according to Swedbank chief economist Mattias Persson. He believes that such a large increase would hurt households who are currently postponing large expenditures under the pressure of energy costs.

« The economy is already slowing down, especially when it comes to consumption, » he said in a phone interview. « We’ve also seen companies such as Electrolux and Thule warning of profits and announcing cost savings. »

One argument for a 100 basis point move is that the strength of inflation has left officials far behind the curve, Persson added.

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More aggressiveness could also help the Riksbank dampen imported inflation. While board members have largely avoided commenting on the krona’s declines, Deputy Governor Martin Floden said last month that the currency was « far too weak » and expected to strengthen depending on trends. expectations that the Riksbank will act more decisively than the ECB.

Since then, the krone has lost more ground against the euro as well as the dollar, and it is the second worst performance of the major currencies this year. Nordea chief analyst Torbjorn Isaksson said the exchange rate posed « a dilemma ».

The krone “could weaken if the Riksbank does not raise the key rate enough,” he said. « On the other hand, significant rate hikes could crack the housing market. »