Riksbank Plans Rate Hike Despite Increase in Global Risks

(Bloomberg) -- Sweden's Riksbank is sticking with a plan to wind back monetary support for the biggest Nordic economy, even as the world's major central banks lurch toward more stimulus.

The Stockholm-based bank held its main interest rate at minus 0.25%, as expected, and reiterated its intention to raise rates. Its forecast still indicates that the repo rate “will be increased again towards the end of the year or at the beginning of next year,” the bank said on Wednesday.

The krona strengthened about 0.3% against the euro after the decision was announced, though it pared those gains and was trading little changed by around 1 p.m. in Stockholm.

Claes Mahlen, an economist at Handelsbanken, said the decision is more hawkish than he'd expected, adding that the rate path still indicates a small probability of an October hike. During a press conference after the decision was announced, Governor Stefan Ingves hinted that he thinks markets are too pessimistic, given the economic data available.

Global Risks

But the Riksbank also said that “the risks surrounding developments abroad can have a bearing on the prospects for Sweden, which emphasizes the importance of proceeding cautiously with monetary policy.”

For an export-reliant economy like Sweden's, plotting a path away from stimulus has grown more difficult since the Federal Reserve and the European Central Bank both took a decidedly more cautious stance amid a global trade war and recession fears. But Riksbank policy makers also need to take into account a Swedish inflation rate that's been around the 2% target since late 2016, and a very weak krona.

In neighboring Norway, the central bank has adopted one of the rich world's most hawkish monetary stances after delivering three rate hikes since September, and promising further tightening ahead. Western Europe's biggest oil exporter is responding to signs of domestic overheating amid a surge in oil industry investments.

The Riksbank has also faced criticism for missing earlier opportunities to raise rates, when tightening would have been less of a solo mission than today.

“We're seeing the cycle weakening, so I think it's going to be difficult for the Riksbank to raise the rate, especially when the ECB and the Fed are adding fuel,” said Klas Tikkanen, the chief operating officer of Nordic Capital.

“We have lost our chance to hike interest rates,” he said in an interview on Tuesday. “We should have done it earlier when the economy was more stable and had a different outlook, maybe two-to-three years ago.”

On Wednesday, the Riksbank said that “activity in the Swedish economy has remained high since the monetary policy meeting in April.”

“Resource utilization is expected to be high even though developments on the labor market will enter a calmer phase in the years ahead.”

Here's how one economist summed up the monetary picture after the Riksbank's announcement on Wednesday:

To contact the reporter on this story: Amanda Billner in Stockholm at abillner@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger, Nick Rigillo

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