Sweden’s central bank on Tuesday decided to hike its benchmark repo rate for a seventh consecutive rate-setting session to stave off inflationary pressures and to stabilize resource utilization around a normal level.

Riksbank raised the repo rate by 25 basis points to 2 percent. The bank said there is a need to gradually increase the rate to stabilize inflation close to the 2 percent target and resource utilisation around a normal level.
The central bank said that consumer price inflation is high at present as a result of rising mortgage rates. Though underlying inflationary pressures remain low, they are expected to increase as economic activity strengthens.
The forecast for the repo rate was held unchanged. Meanwhile, the bank lowered the inflation outlook for this year to 3.1 percent from 3.2 percent predicted in April. The forecast for 2012 was also slashed to 2.7 percent from 2.8 percent.
In an economic commentary released last month, the central bank indicated that the consumer price index will exceed the target as higher repo rate leads to increase in mortgage rates. However, the underlying inflation rate will be lower and close to 2 per cent during the forecast period.
Inflation in Sweden stabilized at 3.3 percent in May. According to survey results from TNS SIFO Prospera, one-year ahead inflation expectations among Swedish money market players increased to 2.7 percent in June from 2.5 percent estimated in March.
Riksbank said that if the currently high inflation rate has a more tangible effect on various agents’ long-term inflation expectations and wage formation, monetary policy may need to be tightened more than in the main scenario of the Monetary Policy Report.
If, on the other hand, the international economic situation becomes weaker, particularly as a result of worsening of the fiscal problems in the euro area, the repo rate may need to be raised at a slower pace in the period ahead, the bank noted.
The central bank lowered the growth forecast for the economy this year to 4.4 percent from 4.6 percent estimated in April. For 2012, Riksbank forecasts the economy to grow 2.2 percent, slower than the previously predicted 2.3 percent. The outlook for 2013 was maintained at 2.5 percent.
In the first quarter, Sweden’s annual GDP growth eased to 6.4 percent from the fourth quarter’s record high of 7.7 percent.
During the policy meeting, Deputy Governors Karolina Ekholm and Lars Svensson entered a reservation against the decision to raise the repo rate by 0.25 percentage points and against the repo rate path of the Monetary Policy report.
They preferred a repo rate equal to 1.75 percent and a repo rate path that first rises slowly to 2 percent in the third quarter of 2012, and then rises faster to about 3.8 percent by the end of the forecast period.
(Source: RTTNews)