Swedish Riksbank Surprises With First Rate Hike in Seven Years

(Bloomberg) -- For the first time in seven years, the Swedish central bank raised interest rates, surprising many in the market as policy makers chose to focus on low unemployment instead of an uncertain outlook driven by global trade conflicts.

The Riksbank, which is based in Stockholm, added a quarter of a percentage point to its repo rate, bringing it to minus 0.25 percent. The decision was expected by fewer than half the 24 economists surveyed by Bloomberg.

With inflation and inflation expectations now looking “established” around the Riksbank’s 2 percent target, “the need for a highly expansionary monetary policy has decreased slightly,” the bank said in a statement on Thursday. Policy makers, who had signaled they were ready to deliver a hike either this month or in February, said the next increase will probably come in the second half of 2019.

The krona soared on the news, appreciating as much as 1 percent against the euro, which is its biggest gain since early October.

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Swedish Riksbank Surprises With First Rate Hike in Seven Years

The Riksbank is hiking as it and other central banks try to gauge conflicting information, with unemployment low across large parts of the developed world while stock markets are tanking and a trade war is raging. The Federal Reserve this week went ahead with a rate increase, but struck a more cautious tone about the future. The European Central Bank is ending its flagship stimulus program, though it has signaled rates will remain at record lows “at least” through the summer.

The Riksbank said that its decision follows an assessment that “the employment rate is historically high, companies are reporting major shortages of labor and cost pressures are rising.”

Many economists said they viewed the decision as a compromise, with a second rate increase not seen coming until late next year. At Nordea, economist Torbjorn Isaksson said the wording the bank used “strengthens our view that the next rate hike is a long way off.”

The krona pared some of its gains, but was still trading about 0.8 percent higher against the euro about an hour after the decision was announced.

Here’s what Robert Bergqvist, the chief economist at SEB, had to say about the decision:

At Svenska Handelsbanken, Chief Economist Christina Nyman called it a “very dovish hike.”

“The rate path was clearly revised down, so that’s maybe sending a signal that they are not completely happy with inflation pressure, but it’s still a first step. I don’t think you can see it as the beginning of a rate hike cycle.”

Swedish Riksbank Surprises With First Rate Hike in Seven Years

Timing is everything and the Riksbank has been burned in the past when it raised rates at the wrong point in the cycle. The bank was attacked by Nobel laureate Paul Krugman for what he dubbed as sadomonetarism, when it started hiking at the height of Europe’s debt crisis. Back then, it was forced to do a U-turn that ultimately led it into the extremes of stimulus it’s now trying to exit.

Swedish Riksbank Surprises With First Rate Hike in Seven Years

At the current level, “monetary policy is still expansionary and will thereby continue to support economic activity,” the bank said.

©2018 Bloomberg L.P.