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Riksbank Seen Zeroing In on First Rate Increase in Seven Years

Amanda Billner
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Riksbank Seen Zeroing In on First Rate Increase in Seven Years

(Bloomberg) -- Sweden’s central bank could this week give a clearer signal that it’s ready to tighten already in December as policy maker are growing eager to end almost four years of negative interest rates.

Governor Stefan Ingves and his colleagues are on Wednesday expected to keep their benchmark unchanged at minus 0.5 percent, but could signal a greater probability that they will move before the end of year rather than wait until February.

The bank is plotting an exit from an era of extreme monetary policy as inflation is now showing signs of stabilizing around its 2 percent target after years of anemic price growth. It’s joining other banks, such as the U.S. Federal Reserve and the European Central Bank, in withdrawing stimulus even as doubts grow over the global economic outlook.

Helped by a massive dose of stimulus over the past four years, Sweden’s economy is in its longest expansion since the early 1980s and policy makers are now finally seeing price growth tick up. Inflation reached the highest level since 2008 in September, leading several prognosticators to revise their forecasts to expect a December increase.

“December is alive as long as inflation is in line with the Riksbank’s expectations,” Anna Breman, chief economist at Swedbank, said in a phone interview. “When the board announces its rate decision in October they may try to prepare the market more for that a rate hike is coming in December.”

But they are unlikely to go too far out on a limb, with core inflation still below target and amid signs the economy is cooling. Despite the krona being the worst performer in the Group-of-10 this year, policy makers are still worried that any tightening signals could trigger a fast turnaround in its fortunes, and again drive inflation lower.

Breman said that could lead the bank to pull off a so-called dovish increase in December, meaning it raises rates while at the same time lowers its outlook for rates ahead.

A clearer indication of a tightening in December could go some way in healing a split on the bank’s board. Two of its members, Martin Floden and Henry Ohlsson, have been advocating for faster increases and could argue for one next week, while a majority have called for more caution.

Here’s what the biggest Nordic banks say:

To contact the reporter on this story: Amanda Billner in Stockholm at abillner@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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