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    MARKET EDGES

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Compared to the politically compromised Fed, statements from Sweden’s Riksbank today couldn’t be more sober. In its press release the Bank summarized its move to raise the main repo rate 25 bps to 1.00% as:

The Swedish economy is growing rapidly. On the other hand, the strength of the recovery in the United States and Europe remains uncertain.  Inflationary pressures are low in Sweden, but are expected to increase as economic activity strengthens. In order to stabilize inflation close to the target of 2 per cent and attain normal levels of resource utilisation, the repo rate needs to be gradually raised. The Executive Board of the Riksbank has therefore decided to raise the repo rate 0.25 of a percentage point to 1.0 per cent. However, due to the weak developments overseas, it is not deemed that the repo rate needs to be raised so much in the coming years.

Sweden’s inflationary environment is rather tame: the Consumer Price Index (CPI) stands at +1.4% in September Y/Y and the Producer Price Index (PPI) rose only +0.4% in September month-over-month, or +2.6% Y/Y. However, the Bank notes that currency appreciation and the country’s forecast for growth of +4.8% in 2010 and +3.8% in 2011 will boost inflationary pressures in the coming quarters.

Much like the Chinese, Norwegian and Australian central banks, which have raised interest rates to curb inflation and increase the rate of personal savings for their citizenry this year, Sweden joins the club of countries proactively addressing domestic economic policy in an environment in which global growth, particularly in the US and continental Europe, slows.  

The Swedish Krona has steadily gained versus the EUR this year, up 10.2% year-to-date. We’ll be monitoring the currency as it stands to continue to benefit alongside GDP growth that should outperform most of the European continent and gradual interest rate hikes that should buoy confidence. Equally, because the Riksbank is not hostage to the EUR, we like the set-up from a monetary standpoint, should the Bank need to maneuver around slowing global demand.

Matthew Hedrick

Analyst

Sweden’s Riksbank Preemptively Fights Inflation - schweden