Riksbank hikes rate in U-turn to join global central banks

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Sweden’s central bank raised its interest rate and announced further hikes to come, completing a reversal in monetary policy to join its global peers in the fight against inflation.

The krone surged as the Riksbank raised its benchmark rate from zero to 0.25% and said it would make two or three more hikes in 2022. Officials also pledged to reduce the pace of asset purchases in the second semester.

The change now brings the Riksbank more in line with its counterparts, including the US Federal Reserve, which last month decreed its first rate hike since the start of the pandemic. In the neighboring euro zone, the European Central Bank is also heading for a tightening as it winds down its emergency stimulus measures.

While investors were anticipating the rate hike, only 2 of 18 economists polled by Bloomberg expected the first such move to come so soon.

“A record hawkish political pivot” signals the Riksbank’s willingness “to throw the economy under the bus,” Svenska Handelsbanken economist Johan Lof said in a note to clients. He stressed that policymakers are ready to “do what is necessary to achieve” his 2% inflation target in a scenario with high and entrenched inflation, including rising unemployment.

The decision, which now shows the rate hitting less than 2% over a three-year horizon, is a dramatic swing for the central bank since its last meeting, when officials signaled no hike until 2024.

That stance collapsed in mid-March, when Governor Stefan Ingves said a faster increase would likely be needed. Colleagues quickly joined in on this, setting the stage for an accelerated move.

The Riksbank’s bold insistence in its February decision to go against the global consensus on inflation risks has made the central bank one of the most dovish in the advanced world.

Now, Swedes’ expectations of no less than three hikes this year exceed “even our relatively hawkish expectations”, according to Credit Agricole’s Valentin Marinov. “The biggest change appears to be the announcement of a series of hikes rather than just a cautious normalization of policy rates in response to the latest spike in inflation.”

Since February, inflation has reached its highest level in three decades. Thursday’s data also suggests the spike wreaked havoc on the economy, which contracted 0.4% in the first quarter.

The 1% jump in the Swedish krona against the euro after the announcement was the biggest strengthening after a rate decision since at least 2013, according to Karl Steiner, chief quantitative strategist at SEB.

While Steiner’s colleague at SEB, Robert Bergqvist, hailed the rate move on Twitter as a boost to the Riksbank’s credibility, other economists expressed concern that the new policy path charted by the central bank poses risks to the Swedish economy.

“A rate hike, steep forecasts and a drop in asset purchases will mean weaker growth and too high unemployment,” Lansforsakringar’s Anders Nordberg said on Twitter. “This tightening will be costly and risky.”

The policy reversal is one of the most dramatic of Ingves’ tenure, who took over the reins of the institution in 2006. He will step down at the end of this year.

(Updates with the Economist in the fifth paragraph.)

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