Sweden’s Riksbank raised borrowing costs and pledged accelerated bond sales, a response to stubborn inflation and a weak currency that’s seeking to limit fallout on a vulnerable real estate sector.
The executive board led by Governor Erik Thedeen lifted its policy rate by a quarter point to 3.75%, and said it expects to increase the rate “at least one more time” this year.
The Swedish krona hit a new record low versus the euro immediately after the announcement, which matched most economists’ expectations and defied some market speculation that the Riksbank could make a bigger move following half-point increases last week by Norges Bank and the Bank of England.
The central bank will also unwind asset holdings faster than previously planned by expanding monthly government bond sales to 5 billion kronor ($462 million) from 3.5 billion, which it said could contribute to a stronger krona.
“Inflation remains far too high, and in parts of the economy, demand is also strong, which fuels inflation,” Thedeen said at a news conference in Stockholm. “We will do what it takes to lower inflation rates within a reasonable time frame.”
After an initial weakening to more than 11.82 kronor per euro, the currency pared some of the losses, trading 0.2% lower at 11.7959 at 12:26 p.m. in Stockholm. The moves follow a long period of decline that is making it harder to fight inflation as the cost of imported goods rises.
While inflation in Sweden has decelerated in recent months as producers’ cost burdens eased, price increases on important goods and services continue to be far higher than officials are comfortable with, as they aim to bring the CPIF inflation rate back to 2%. The central bank kept its forecasts on price growth largely unchanged, seeing its key target metric slowing to 2.4% next year and 1.8% in 2025.
In May, that measure, which strips out the impact of interest rate changes, stood at 6.7%, as prices on services such as restaurant meals and hotel stays rose at a rapid clip.
“The increase in service prices is unexpectedly strong, showing no clear tendency that inflation is slowing,” Thedeen said. “This is very worrisome. It could indicate that the inflation rate is declining at a slower pace than we believed it would, and that it may remain at levels that are too high.”
Economists at Sweden’s two largest banks, SEB AB and Swedbank AB, changed their views to forecast more tightening than previously forecast after the decision. Swedbank said it now expects quarter-point hikes in September as well as November, as a combination of inflationary risks and other central banks’ moves toward more hawkish policies is likely to lead to a longer period of tightening.
“The Riksbank’s policy is not yet restrictive enough to control inflation,” Handelsbanken senior economist Johan Lof said in a note to clients after the announcement. “The economy remains inflationary with still high profits, rising household incomes via higher employment and accelerating wages — fueling a rising nominal spending trend, and making further price rises possible.”
While a bigger rate hike could potentially have provided support to the currency, the Riksbank must also weigh concern about how higher borrowing costs impact the country’s troubled commercial real estate sector. Samhallsbyggnadsbolaget i Norden AB, commonly known as SBB, has become emblematic of the industry’s woes as a legal battle over whether it breached its bond terms is brewing, following a downgrade to junk by S&P Global Ratings.
Other sectors of the Swedish economy have withstood the onslaught of rising borrowing costs better than expected, with exports buoying growth, and employment levels continuing to rise. The Riksbank now projects economic output to contract by 0.5% this year, which is an upward revision from its previous forecast for a 0.7% drop in gross domestic product.
The central bank also announced that it is considering to partly hedge its foreign exchange reserves, a measure that Thedeen said is aimed squarely at reducing financial risks, and shouldn’t be seen as “currency intervention in disguise.”
“If the currency strengthens, in line with our strong belief, we will lose a lot of money, and we have a duty to take that risk into consideration,” the governor said. “Any potential transactions will follow a very transparent pattern, in stark contrast to how interventions are typically conducted.”
--With assistance from Naomi Tajitsu, Mark Evans and Joel Rinneby.
(Adds comments from Riksbank Governor from fifth paragraph.)
