Sweden raises interest rates

Sweden’s Riksbank this morning raised its repo rate by 0.25% to 1.5%, citing strong growth in the economy.

“To stabilise inflation close to the target of 2% and to avoid resource utilisation being too high, the repo rate needs to gradually increase,” the central bank said in a statement.

“The Executive Board of the Riksbank has therefore decided to raise the repo rate by 0.25 percentage points to 1.5%. The assessment is also that the repo rate needs to be raised somewhat faster in the coming period.”

Sweden was one of the fastest growing developed economies in 2010, prompting minister of finance Anders Borg to declare in January this year that the country was a new “Tiger” economy.

The Riksbank pointed to further evidence of this growth continuing through 2011 to support its position on monetary tightening.

“The Swedish economy remains strong, and the labour market situation is steadily improving. Exports and investment are increasing, and so is household consumption. Growth in the world economy as a whole is also good, and prospects in the United States look somewhat brighter. Developments in Europe are still uncertain, as a result of the fiscal problems in several European countries. On the whole, the prospects for continued high growth in Sweden are good.”

Some, such as the Swedish Property Federation, have recently argued against tightening, but the bank says there is potential for a squeeze on spare capacity in the economy and wages rising faster than expected, pushing up the risk of inflation rising higher than its target.

“To stabilise inflation close to the target of 2% and to avoid resource utilisation being too high, there is a need to gradually increase the repo rate.”

The bank has increased its forecast repo rates in the next three years, rising to 2.5% by the first quarter of 2012, 3.2% by the same period in 2013 and 3.6% by 2014.

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