The national bank of Sweden has said it will raise its policy rate to 3.5%, with further increases expected.
In a statement, Sveriges Riksbank said the rise would become effective from 3 May after the executive board gave assent to the increase of 0.5 percentage points. It added the rate would be raised by another 0.25 percentage points later in the year – either in June or September.
“Inflation is still far too high and far from the inflation target,” the bank noted. “The high inflation has a negative effect on the whole economy, but particularly affects households that have small margins. For inflation to fall and stabilise around the target within a reasonable period of time, the executive board has decided to raise the policy rate by 0.5 percentage points to 3.5%.”
It added: “Because of the rapid upturn in inflation, the Riksbank has raised the policy rate unusually rapidly since April 2022, from 0% to 3.0% in February 2023. The rate increases have not yet had full impact on economic activity and inflation. But the effects are becoming increasingly clear and [consumer price index] inflation has fallen in recent months, roughly in line with the Riksbank’s latest forecast. However, the downturn is due to falling energy prices. [Consumer price index] inflation excluding energy has been much higher than in the Riksbank’s forecasts during the first months of the year.”
Steep increase since May 2022
Statistics from the bank show a steep increase in the policy rate since the middle of last year. After a policy rate of -0.25% was set in 2019, this was upped to 0% in January 2020, then to 0.25% in May 2022, to 0.75% three months later, to 1.75% in September 2021, 2.5% in November the same year, and 3% in February.
A definition of the ‘policy rate’ from the bank states it is “our main monetary policy tool” and continues: “By raising or cutting the policy rate, the Riksbank can affect other interest rates in Sweden, which affects demand in the Swedish economy and thereby inflation.”
It adds: “The policy rate is the rate that governs which rates the banks can deposit in and borrow money from the Riksbank. The banks’ deposit and lending rates at the Riksbank in turn affect the banks’ interest rates on loans and savings accounts.”
In its 67-page report accompanying the announcement, the bank predicted inflation would drop later in the year as demand and energy prices fall. It also said, however, that economic activity in Sweden is weakening.
“Despite large price increases, tighter monetary policy and an energy crisis, Swedish GDP rose by 2.6% in 2022 compared with 2021,” it added. “The high economic activity also had a significant impact on the labour market where the employment rate rose to new record levels.
“Unemployment fell from 8.8% to 7.5% and labour was in very short supply. During the second half of last year, Swedish households reduced their consumption when real incomes fell and overall consumption decreased by more than 2% over two quarters. Corporate investment, both in fixed assets and in stocks, also decreased in the fourth quarter. GDP fell by 0.5% compared with the previous quarter.”
