Sweden’s Riksbank has become the latest central bank to prepare for higher interest rates, removing the potential for a near-term easing as inflation gains a foothold in Scandinavia’s largest economy.
The move signals that the bank is nearing the end of a three-year, all-out effort to spark inflation in the $500 billion economy. Once derided as “sadomonetarist” by Paul Krugman for keeping rates too high, and now criticized by some for keeping them too low, the Stockholm-based bank joins the likes of the European Central Bank and the Bank of England in signaling that the cost of money is now headed higher after years of massive easing.
In an expected decision, the Riksbank on Tuesday held its benchmark repo rate unchanged at minus 0.50 percent, while eliminating the chances of another cut. The rate path now envisages rates remaining at their current level until mid-2018 and rising above zero during the latter half of 2019.
“The fact that inflation has recently been slightly higher than expected and that the risks of setbacks abroad are thought to have decreased makes it less likely than before that the Riksbank will cut the repo rate in the near term,” the central bank said. “This does not rule out repo rate cuts in the period ahead.”
The krona slid 0.2 percent to 9.671 per euro as of 10:55 a.m. in Stockholm.
Nordea Bank AB analyst Mikael Sarwe dubbed the decision “dependence day.”
Removing the easing bias “acknowledged the dependency between Riksbank policy and the global trend in monetary policy, i.e. less dovish signals,” he said.
Three other factors are also behind the decision: Swedish inflation has edged closer to the bank’s 2 percent target; an inflation-killing kronor surge has failed to materialize; while global political risks — such as the potential victory of anti-globalization and anti-European Union candidate Marine Le Pen in the French presidential elections — have subsided since the Riksbank’s last meeting in April.
“International economic activity is increasing in line with the Riksbank’s
forecasts,” the bank said. “The risk of setbacks has declined, although there is still economic and political uncertainty in many parts of the world.”
The bank on Tuesday also kept in place a quantitative easing program that involves the purchase of about 15 billion kronor ($1.8 billion) in government bonds through the end of the year. It has snapped up almost 40 percent of the government bond market.
Years of record-low rates have fueled price increases in the property market and household debt. But they have also helped turn Sweden’s economy into one of Europe’s fastest growing, with gross domestic product expected to rise by more than 2 percent per year through 2019 after rising 3.2 percent in 2016, according to Riksbank estimates.