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Sweden interest rate rise: Riksbank vows to maintain aggressive policy as surging inflation makes mockery of target

By Ryan Hogg

Edited by Vanessa Kintu

17:01, 10 November 2022

A wonderful aerial panorama from a bird's-eye view on the observation deck of the Town Hall tower to Gamla Stan (Old Town), Stockholm, Sweden
In Sweden, the main interest rate is called the Riksbank policy rate. Photo: Andrey Shcherbukhin / Shutterstock

Interest rates in Sweden are returning to an upward trajectory, hitting a decade high as inflation returns to levels seen in the early 1990s.

After one of the most aggressive one-off rate hikes in the developed world this year, the rate of inflation has continued to increase. Sweden’s central bank, the Sveriges Riksbank, could respond, but how?

What are interest rates and how are they set up in Sweden?

Interest rates are effectively a charge on loans. They define the rate of interest charged for borrowing, and the rate of return on lending. They are used by central banks as a key lever of monetary policy to affect levels of demand in an economy. 

When the economy runs too hot and prices are rising too quickly, central banks increase the interest rate. This filters through to interest rates on everything from business loans to mortgages.

This makes borrowing more expensive and saving more attractive, reducing demand in the economy and pulling inflation down.

When the economy is in a deflationary phase – usually during a recession – central banks reduce interest rates to stimulate demand in the economy.

In Sweden, the main interest rate is called the Riksbank policy rate, and is set by the Riksbank.

The bank sets the Sweden interest rate with a target rate of 2% inflation in mind – 2% is regarded as slow and stable enough to stimulate demand while preventing a cost of living crises.

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Swedish interest rate history

Swedish interest rate, 2012-2022

Sweden’s interest rate history has typically followed that set by the eurozone’s European Central Bank (ECB), its larger neighbouring economic area.

In 2015, the Riksbank pulled interest rates below zero in an attempt to stimulate demand enough to bring inflation up to its 2% target, breaking with its trend of following the ECB. The policy rate sat at 0.5% between 2016 and 2019. 

The Cato Institute assessed that this had limited impact. Swedish rates were typically more responsive to economic movements in the wider eurozone, which was also experiencing low rates of inflation during the period.  

The country brought rates back up to zero in 2020 after the initial wave of the Covid-19 pandemic had passed. In May 2022, it hiked the policy rate by 25 basis points (bps). Another 50 bps in July took the rate to 0.75%.

Rates are currently back at their highest in more than a decade after the Riksbank increased its policy rate by 100 bps to 1.75% in September. This was the biggest Sweden interest rate hike in nearly three decades – a stark warning that prices were too high and more needed to be done.

“Inflation is too high. It is undermining households’ purchasing power and making it more difficult for both companies and households to plan their finances. Monetary policy now needs to be tightened further to bring inflation back to the target” Sveriges Riksbank announced alongside the rate rise.

Key factors shaping the Sweden interest rate

The interest rate in Sweden is being shaped by soaring inflation. 

The country’s main indicator of price rises, the consumer prices index with a Fixed interest rate (CPIF), hit 9.7% in September. This was nearly five times the Riksbank’s target rate – the highest level since 1991, and up from 9% in August. 

The country has been hit by its reliance on Russian gas, which is in short supply since Russia invaded Ukraine. 

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Sweden imported 8% of its crude oil and 30% of its natural gas from Russia, Sweden’s Library of Congress reported. The congress noted that Swedish imports of Russian energy had dropped 59% between March 2021 and March 2022, putting pressure on prices.

The country is also being forced to respond to strong levels of domestic demand, the Riksbank said. Swedes spent the proceeds of huge economic stimulus unleashed across the country to cope with the impacts of the pandemic.

“That consumer prices in Sweden have become so high is due not only to effects from abroad but also to good economic activity in Sweden,” the Riksbank said in its September monetary policy report.

“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 stabilises around the target of 2% within a reasonable time perspective.”

The new Swedish government is making its own contribution to Sweden interest rate news, announcing its first budget in early November. The right-wing government planned to cut fuel tax, and increase spending by $3.7bn on defence, welfare and the police, Reuters reported.

Higher spending could have further detrimental effects on the Swedish economy, which could risk replicating the crisis UK markets experienced under the previous Liz Truss-led government.

US dollar to Swedish krona exchange rate

Sweden’s currency, the Swedish krona (SEK), has struggled to maintain its strength against the US dollar (USD) this year as it fought heavy volatility brought on by inflation. The krona is down 15% against the greenback in the year to date (YTD). Investors have fled to the safe haven dollar. The US Federal Reserve (Fed) has implemented a hawkish monetary policy to tame inflation.

A weakening currency makes imports more expensive, and stimulates exports when domestic demand is already unsustainably high.

The Riksbank’s late but aggressive 100 bps hike has helped the krona recover slightly, rising by 5.7% from lows in September.

Sweden interest rate forecast for 2022 and beyond

Most analysts believe Sweden’s interest rates have not bottomed out yet. 

In September, Nordea forecast that Sweden’s interest rate could hit 2.5% by the end of 2022, and remain there over 2023 and 2024:

“The expected compensation for households and businesses is assumed to limit the effect of energy prices on inflation. Global transport costs and commodity prices have fallen this year.

“Domestic demand is expected to lose steam, which will also ease the price pressure on services. Inflation will thus fall next year and the Riksbank is expected to keep its policy rate unchanged.”

In August, prior to the latest 100 bps rise, Skandinaviska Enskilda Banken AB (SEB) Group expected the policy rate to hit 2.25% in April 2023, before falling by an unspecified amount in 2024.

Meanwhile, the Organisation for Economic Co-operation and Development (OECD) forecast long-term interest rates to reach 2.4% by the end of 2023.

A Swedish interest rate forecast by TradingEconomics projected the rate to rise to 2.25% by the end of 2022, and a further 3% in 2023, before falling back to 2.5% in 2024.

Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose.

FAQs

What is the current interest rate in Sweden?

As of 10 November, the Sveriges Riksbank policy rate was at 1.75%, representing 10-year highs.

Will interest rates go up or down in 2023 in Sweden?

No one can say for sure. At the time of writing (10 November), analysts expected that interest rates could go up in Sweden in 2023, as the central bank continues to battle decades-high inflation.

However, these predictions could be wrong. Always do your own research before making any investment decisions. Remember to never trade more money than you cannot afford to lose.

Where will interest rates be in 5 years in Sweden?

While there isn’t a forecast for Sweden interest rates in five years’ time, analysts broadly expected the rate to rise in 2023 before falling again in 2024. Although their forecasts could be inaccurate.

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