Riksbank Hikes Rate in U-Turn to Join Global Central Banks

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Sweden’s central bank raised its interest rate and signaled more increases to come, completing a U-turn in monetary policy to join global peers in the fight against inflation.  

The krona jumped as the Riksbank raised its policy rate to 0.25% from zero, and said it will deliver another two or three hikes in 2022. Officials also pledged to cut the pace of asset purchases in the second half. 

The shift now aligns the Riksbank more with counterparts including the U.S. Federal Reserve, which last month enacted its first rate hike since the pandemic struck. In the neighboring euro zone, the European Central Bank is also moving toward tightening as it winds down emergency stimulus. 

While investors anticipated the rate increase, only 2 of 18 economists surveyed by Bloomberg had expected the first such move to come so soon. 

“A record-large hawkish policy pivot” signals the Riksbank’s readiness “to throw the economy under the bus,” Svenska Handelsbanken’s economist Johan Lof said in a note to clients. He pointed out the policy makers are ready to “do what is required to achieve” its 2% inflation-target in a scenario with high, entrenched inflation, including driving up unemployment.

The decision, which now shows the rate reaching below 2% on three-year horizon, pivots the central bank drastically from its last meeting, when officials signaled no hikes until 2024. 

That position crumbled in mid-March, when Governor Stefan Ingves said a sooner increase would probably be needed. Colleagues soon joined him in that view, setting the scene for an accelerated move. 

The Riksbank’s bold insistence at its February decision to go against the grain of global consensus on the risks of inflation made the central bank stand out as one of the most dovish in the advanced world. 

Now, the Swedes’ expectations of as many as three hikes this year exceed “even our relatively hawkish expectations,” according to Valentin Marinov at Credit Agricole. “The biggest change seems to be the announcement of a series of hikes rather than just a cautious policy rate normalization in response to the latest spike in inflation.”

Since February, inflation surged to the highest level in three decades. Data on Thursday also suggested that spike has taken its toll on the economy, which contracted in the first quarter by 0.4%. 

The Swedish krona’s 1% jump against the euro after the announcement was the largest strengthening after a rate decision since at least 2013, according to Karl Steiner, chief quantitative strategist at SEB.

While Steiner’s colleague at SEB, Robert Bergqvist, welcomed the rate move on Twitter as a boost to the Riksbank’s credibility, other economists voiced concern that the new policy path charted by the central bank poses risks to Sweden’s economy. 

“A rate increase, steep forecast and lower asset purchases will mean lower growth and too high unemployment,“ Lansforsakringar’s Anders Nordberg said on Twitter. “This tightening will be expensive and risky.”

The policy reversal is one of the most dramatic in the tenure of Ingves, who took charge of the institution in 2006. He will step down from his role at the end of this year. 

©2022 Bloomberg L.P.