The Riksbank raised its interest rate by a full percentage point in its most aggressive tightening of almost three decades of inflation targeting, starting a global round of monetary policy action to bring prices under control.
The Swedish central bank lifted its policy rate to 1.75 percent, defying the forecasts of most economists for a smaller move as officials escalated their response to price increases that have exceeded their forecasts for 11 straight months.
“The risk is still large that inflation becomes entrenched and it is extremely important that monetary policy acts to ensure that inflation falls back and stabilizes,” officials said in a statement in Stockholm.
Photo: Bloomberg
“Monetary policy now needs to act more than was anticipated in June,” they said.
By this time next year, the rate is likely to have reached 2.5 percent, which implies another 0.75 percentage points in tightening, their new forecasts showed.
The outsized move places the Riksbank alongside the Bank of Canada as the only two central banks overseeing the world’s 10 most-traded currencies to have hiked by such an amount this year.
The decision is a prelude to the highlight of the week, when US Federal Reserve policymakers are predicted to stick with a 75 basis point increase amid some investor speculation that they could go for a bigger increment as the Swedes have done.
Other counterparts also anticipated to hike rates this week include the Bank of England, the Swiss National Bank and Norway’s central bank, all of which are expected to keep up or even intensify the aggression of their policy stances.
Swedish inflation last month reached another three-decade high at 9 percent, highlighting how policymakers had underestimated price increases after what was long one of the most stimulus-friendly approaches in the rich world.
As it seeks to catch up, the Riksbank is facing a dilemma familiar to its global peers of how to dampen inflation without too much harm to the economy. That is especially acute in Sweden, where household indebtedness is high and more than 40 percent of outstanding mortgages feature rates that are set for periods of no more than three months.
The increase in borrowing costs has so far led to an 8 percent decline in house prices from a peak earlier this year, and a simultaneous run-up in energy and mortgage costs could lead to an accelerated slump.
The Riksbank cut all its growth forecasts and now expects the Swedish economy to contract 0.7 percent next year instead of expanding by that amount.
“It would be even more painful for the Swedish economy if inflation were to remain at the current high levels,” officials said. “By raising the policy rate more now, the risk of high inflation in the longer term is reduced and thereby the need for an even greater monetary tightening further ahead.”
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