Sweden's Riksbank raises rate to 3.50%, says nearly done with hikes

Sweden's central bank raised its policy rate by half a percentage point to 3.50% as expected on Wednesday and said it was nearly done with policy tightening, delivering a dovish message that surprised markets and sent the crown tumbling. With inflation near 30-year highs, central banks have raised rates aggressively in recent quarters.

Sweden's central bank raised its policy rate by half a percentage point to 3.50% as expected on Wednesday and said it was nearly done with policy tightening, delivering a dovish message that surprised markets and sent the crown tumbling.

With inflation near 30-year highs, central banks have raised rates aggressively in recent quarters. The pace of hikes has now slowed as rate-setters eye financial market turmoil and slowing economies as well as signs that inflation has peaked, but they are not quite done yet. In Sweden, underlying inflation - at 8.9% in March - has started to ease, but remains far above the Riksbank's 2% target. "Inflation is high and that's worrying. But we also see a development where inflation is going to slow, that's our main scenario," Governor Erik Thedeen told reporters.

The Riksbank said the policy rate will probably be raised by a further 0.25 percentage points in June or September. While the half-percentage point hike was in line with forecasts, the rate path was a surprise.

The dovish tilt in policy was also underlined by two of the five rate-setters voting for a smaller hike this time. Deputy Governors Martin Floden and Anna Breman wanted a quarter point hike with the flexibility to tighten more or less later this year.

Markets cut their expectations of where the Riksbank policy rate will peak to around 3.75% from close to 4.0% prior to the decision. The Swedish crown slipped around 1% against the euro after the announcement, an unwelcome development for the central bank which has complained the weak currency has made fighting inflation more difficult.

The European Central Bank is expected to hike by only a quarter percentage point on May 4, which could give the crown some breathing room. Still, the ECB's peak rate is expected to hit 3.75%. The crown "could face further headwinds if the Riksbank does not follow the ECB, which we expect will hike by another 75 basis points", banking group Swedbank said.

Swedbank said the Riksbank would hike by a quarter point in June and again in September, taking the policy rate to 4.0%. "If incoming data surprises negatively, that's to say it indicates higher inflation, the Riksbank will hike rates more than is in the rate path," Thedeen told reporters.

 

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