Sweden's Riksbank Raises Repo Rates

Sep 7, 2007 - The Sweden's Central Bank, the Riksbank, decided to increase its repo rate by 25 percentage points to a rate of 3.75%, the Executive Board announced, Friday. The Bank also said that the rate would be hiked further to contain inflation to the target rate of 2% by next year, while helping the economy grow in a balanced manner. The Bank's decision was based on the June Monetary Policy Report.

The Swedish economy grew stronger than expected in the second quarter, the Riksbank said. The labor market had become tighter and lending had increased, while house prices had risen. Cost pressures had built up, as productivity growth was less than expected in the second quarter. Food prices had increased more than anticipated, while companies and households had revised their inflation expectations upwards for the coming year, the Bank observed.

The Bank also took note of the general increase in uncertainty and unwillingness to invest, due to the turmoil in the financial markets engendered by the problems in the US sub-prime market. The unrest in the financial markets was expected dampen economic growth.Thus by increasing the repo rate 0.25%, the Bank hoped to balance the need to rein in inflation, with the need to sustain production and employment growth.

Future changes in the interest rate would depend on the growth of the economy and inflationary pressures. “The future direction for monetary policy will depend on how new information on economic developments abroad and at home will affect the prospects for economic activity and inflation in Sweden,” the Executive Board said.

A separate report by the Handelsbanken Capital Markets said that Swedish interest rates would rise to 5.5% over two years. It predicted that the Swedish economy would grow 3.7% in 2007, followed by a 3.2% growth in 2008.