By Simon Johnson
STOCKHOLM (Reuters) – The Riksbank raised its key interest rate by three-quarters of a percentage point to 2.5 percent on Thursday and signaled further hikes next year to combat inflation.
The Riksbank had projected interest rates at zero for the next few years back in February, but was surprised at how quickly prices rose this year, driven by lingering effects of the pandemic war with Ukraine.
Data for October was unsavory again, showing a jump in core inflation of 7.9%, forcing longtime Riksbank chief Stefan Ingves to be more hawkish on policy at the last planned rate-setting meeting.
“The risk … that the current high level of inflation will become entrenched,” the central bank said in a statement.
“Forecasts suggest that the policy rate could be raised further early next year before being slightly below 3%.”
At the last meeting in September, Sweden The central bank outlined a 50 basis point hike in November, with rates peaking at around 2.5% next year.
However, markets still see the central bank behind the curve, with rates peaking around 3.% next fall.
“We still think the Riksbank will raise rates by another 50 basis point in February,” Swedbank said in a note.
The Riksbank can do nothing about current inflation, but it wants to prevent soaring prices from spreading to higher wages in a self-reinforcing spiral.
Meanwhile, the economy is expected to contract next year. Mortgage costs are rising, home prices are falling, and many households are already struggling with a cost-of-living crisis.
More rate hikes will exacerbate short-term pain, although the Riksbank believes acting now reduces the risk of rates having to go higher later.
However, the uncertainty is high.
In the US, the Fed may soon scale back its pace of rate hikes. In Europe, some rate-setters at the European Central Bank worry that aggressive rate hikes will only exacerbate the recession everyone expects.
Nordea Bank Group said it expects the Riksbank to raise interest rates to 2.50%, but to start easing earlier 2024.
“The economy will simply remain unchanged,” Nordea economist Torbjorn Isaksson said in a report. Its interest rate path forecast The SEK was largely unchanged after the announcement.