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Sweden is the latest of seven central banks to raise rates since the Federal Reserve slashed borrowing costs last month, as concern that inflation is set to accelerate worldwide offsets the prospect of a recession in the U.S. Australia, Russia, Czech Republic, Poland, Romania and Serbia have all raised rates since Jan. 30 as raw material costs and food prices increase."
Sweden's Riksbank Unexpectedly Raises Benchmark RateBy Jonas Bergman
February 13, 2008 (Update6)
SourceFeb. 13 (Bloomberg) -- Sweden's central bank unexpectedly raised its benchmark interest rate to 4.25 percent, the highest since November 2002, after inflation surged to a 14-year high last year on plunging unemployment and rising food costs.
The rate was raised by a quarter point and will remain ``at roughly the same level over the coming year,'' Governor Stefan Ingves said at a press conference in Stockholm today. All 24 economists surveyed by Bloomberg expected an unchanged rate.
Sweden is the latest of seven central banks to raise rates since the Federal Reserve slashed borrowing costs last month, as concern that inflation is set to accelerate worldwide offsets the prospect of a recession in the U.S. Australia, Russia, Czech Republic, Poland, Romania and Serbia have all raised rates since Jan. 30 as raw material costs and food prices increase.
``It was time to put our foot down,'' Ingves said. ``We needed to do this to ensure a good economic development and to reach our inflation target.''
Underlying inflation, which excludes mortgage costs, subsidies and indirect taxes, reached 2 percent in December, hitting the central bank's target for the first time since September 2003. Overall inflation accelerated to 3.5 percent in the same month, the highest since December 1993.
`Surprised'
The yield on Sweden's two-year bonds jumped 20 basis points, or 0.20 percentage point, to 3.73 percent as of 4:15 p.m. in Stockholm. The krona rose 0.5 percent to 9.35 per euro, and earlier traded at 9.33, the strongest level since November.
``Rarely during my 12 years in the market have I been so surprised,'' said Henrik Mitelman, chief analyst at SEB Merchant Banking, the largest trader of the krona. `It's fascinating that the Riksbank deviates'' from the U.S. Federal Reserve.
A slump in the U.S. mortgage market threatens to push the world's largest economy into recession and derail the Swedish economy. Economic data since the Riksbank's December meeting has also shown that the Swedish economy is slowing and consumer confidence last month slipped to close to a three-year low as stock markets tumbled.
The Fed last month cut its benchmark rate 1.25 percentage points to 3 percent to ward off a recession. The Bank of England lowered its rate to 5.25 percent from 5.5 percent last week, while European Central Bank President Jean-Claude Trichet said that uncertainty about growth is unusually high'' after the ECB kept rates on hold.
Island Far Away
Bank of America Corp., the second largest U.S. bank, by assets, sees a 65 percent chance that ``the Riksbank will reverse its February rate hike with a cut in July,'' said Holger Schmieding, chief European economist at the bank, in a note.
``Sweden is a small open economy, highly integrated into Europe and the world beyond,'' he wrote. ``But the news today could make us believe that Sweden sees itself as an island far removed from the travails of the globe.''
The Riksbank kept a forecast for economic growth of 2.4 percent for this year, and cut its estimate for next year to 2 percent from 2.1 percent. Expansion in 2010 will be 2.8 percent, unchanged from a December assessment.
The bank also forecast that underlying inflation will remain above its 2 percent target over the next three years. Annual inflation will be 2.1 percent in March 2010, the bank said, raising a December forecast of 2 percent.
``We have to take everything into consideration and no matter where we turn we have high inflation,'' said Deputy Governor Irma Rosenberg in an interview today. ``We have high cost pressures in the Swedish economy and it's our important mission to keep inflation low and stable.''
Slowing Down
Growth is slowing, with a report yesterday showing that unemployment held at 3.5 percent in January as dismissals rose to the highest since November 2006. Manufacturing grew in January at the slowest pace since August 2005, a survey this month also indicated and consumer confidence last month slipped to close to a three-year low.
Sweden's benchmark OMX stock index has slipped 12 percent this year. It was up 0.5 percent today, after dropping as much as 2.4 percent earlier.
``Either we are all stupid or we are in a situation where the communication between the Riksbank and the market has broken down completely,'' said Michael Bostroem, an analyst at Danske Bank A/S, the largest trader of Swedish bonds, in a note. ``We tend to think it is the latter and that's very serious.''
A survey of about 1,000 Swedes by pollster Skop released today showed that 64.3 percent expected rates to be unchanged or lower over the next three months. Some 35.7 percent said rates would be higher.
``The Riksbank has this time been very bad in communicating with the public,'' said Oerjan Hultaaker, an analyst at Skop. ``Not only rate experts, but also households benefit from being able to plan one's economy.''
To contact the reporter on this story: Jonas Bergman in Stockholm at
jbergman@bloomberg.netLast Updated: February 13, 2008 10:42 EST