Interest Rates Rise Again

Sweden’s central bank raised its key repo rate on Friday by a quarter percentage point to 3.0 percent, the highest since July 2003, and said further rises would probably be needed to keep inflation on target.

The Riksbank’s sixth hike this year was widely expected in financial markets, although the Swedish crown dipped on policy-makers’ explanatory statement, which traders saw as less hawkish than some had anticipated.

”Continued strong economic activity and rising inflation mean that the repo rate needs to be increased,” the bank said in a statement explaining its decision, which was made at a meeting on Thursday.

”It is reasonable to assume that the interest rate will need to be increased further, roughly in line with recent market expectations.”

Analysts in a Reuters poll last month saw rates peaking at 3.75 percent between the second quarter of 2007 and late 2008.

Danske Markets economist Michael Bostrom said the sanguine tone of the bank’s statement should be soothing to debt markets.

”There was some fear in the market that they would turn a little bit more hawkish, which they didn’t do really. They maintained the tone from the last inflation report,” he said, adding that markets will also take heart from the bank’s suggestion that it may lower its inflation expectations.

”The forecast for inflation made in October may need to be evised downwards in the short term, primarily as a result of lower energy prices,” the bank said.

In October, the Riksbank forecast consumer prices would rise by an annual average of 1.3 percent in 2006 and by 2 percent in 2007. It said underlying inflation, as measured by the UND1X index, would climb 1.2 percent this year and 1.3 percent next.

The Riksbank targets 2.0 percent inflation over a two-year horizon with a 1.0 percent band on either side. Consumer price inflation stood at 1.7 percent year-on-year in November despite a prolonged period of strong economic growth.

The bank said it may lift its forecast for 2007 gross domestic product from the 3.1 percent projected in October.

”GDP growth this year appears to be slightly stronger than expected and there may also be reason for making some upward revision to the forecast for next year’s growth,” it said.

The central bank saw inflation close to target over its two-year forecast horizon.

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