Sweden’s Riksbank to start hiking interest rates in 2024

Bloomberg

The Riksbank expects to start hiking interest rates in 2024, the first sign from the Swedish central bank that it sees an
end in sight to its ultra-loose monetary policy.
While policy makers kept their benchmark unchanged, they also signalled for the first time that they see a case to move higher within three years. Previously they said the rate was likely to remain at zero for the foreseeable future.
In another facet to its policy, the central bank said it plans to keep the size of its balance sheet largely unchanged next year, before tapering in 2023. Sustaining its level will require continued reinvestments as officials scale back asset purchases used to support economy during the pandemic.
“The repo path was raised at the end of the forecast horison (not earlier) and since that is already more than priced in should be rather neutral” for the krona, Danske Bank’s strategist Stefan Mellin said.
The krona advanced by as much as 0.5% to 10.1755 per euro after the announcement before trimming gains.
The decision underscores how the Riksbank is taking one of the most sanguine views of surging inflation among advanced-economy monetary authories, just as Sweden experiences annual price growth at its highest level in 13 years.
The bank confirms that reducing the balance sheet is the first step when reducing the stimulus measures. The bank thus stands out compared to other CBs. A rate hike from the Riksbank still seems distant.
While that spike in consumer costs has prompted a debate about the appropriate response, the majority view among policy makers remains that inflation will slow down next year.
The Riksbank still slightly raised its forecast for price increases in 2022. It expects average inflation to remain just above its 2% target.
“Economic activity is strong and inflation has risen rapidly, largely driven by rising energy prices,” the central bank said in a statement. “With this monetary policy, inflation is expected to be on target going forward.”
Sweden’s economy has fared better than most rich peers’ during the pandemic. While many other European nations are seeing Covid hospitalisations soar again, it has so far been largely unscathed by the latest wave of infections.
Nevertheless, the Riksbank noted a resurgence of the pandemic and said supply-chain bottlenecks are “creating headwinds for growth in the short term.”
All economists surveyed by Bloomberg expected the Riksbank to leave the benchmark rate at zero, but a cautious signal of a rate hike on the horizon was anticipated.
“The Riksbank will tighten monetary policy earlier than what they signalled today,” Swedbank said in a note to clients. “We think that securities holdings will be scaled back during the second half of 2022 and reduced further in 2023, and that the repo rate will be hiked already in the second half of 2023.”