FRANKFURT (MNI) – The Riksbank, Sweden’s central bank, raised its
key repo rate by 25bps to 2.0% on Tuesday, its seventh straight
increase, but adopted a more cautious tone with respect to future policy
moves given ongoing evidence that the recovery has peaked.

“The Swedish economy is growing at a good rate, although
international developments are marked by uncertainty,” the bank said.

“CPI inflation is high at present as a result of rising mortgage
rates,” it said, though it added that “at the same time, underlying
inflationary pressures remain low, but are expected to increase as
economic activity strengthens.”

Today’s move raised misgivings from Deputy Governors Karolina
Ekholm and Lars Svensson, who entered a reservation against the decision
to raise the repo rate and against the repo rate path of the Monetary
Policy Report.

They preferred a repo rate equal to 1.75% and a repo rate path that
first rises slowly to 2% in the third quarter of 2012 and then rises
faster to about 3.8% by the end of the forecast period.

In the accompanying statement, the Riksbank Executive Board said
the Swedish economy is stable despite increased global uncertainty.

“Although the Swedish economy is entering a calmer phase, the
economy is continuing to grow at a good pace. Both domestic demand and
exports are contributing to this development. The labour market
situation is also continuing to develop positively, which means that the
rate of wage increase is rising.”

The Riksbank’s decision to hike interest rates again comes,
however, against the backdrop of a noticeable slowdown in the pace of
recovery, which saw a record rate of expansion in 2010.

June’s PMI number showed Sweden’s manufacturing sector growing at
its slowest pace for two years, while May’s retail sales figure
surprised to the downside, falling 2.3% month-on-month versus
expectations for a rise of 0.4%. Consumption and industrial production
are also showing signs of weakening.

According to Sweden’s National Institute of Economic Research
(NIER), economic growth is set to decelerate in 2011 following strong
growth seen in 2010.

NIER said in a report published June 22nd that Sweden’s GDP would
grow by 4.4% in 2011 and 2.9% in 2012. Sweden’s economy grew by 6.4% in
the first quarter of 2011 and by 5.5% in 2010.

At the same time, NIER forecast unemployment to decrease more
slowly than previously expected, dropping to 7.5% this year, 7.2% in
2012 and reaching a more normal level of around 6% by 2015.

According to NIER, interest rates will reach 2.5% at the end of
2011 before notching up to 3.0% at the end of the following year.

Sweden’s inflation currently stands at 3.3% versus an inflation
target of 2.0%. CPI (excluding interest-rate-affected items) is only
1.7% on an annualised basis.

The bank tweaked its inflation forecast of 3.2% for 2011 to 3.1%
and to 2.7% from 2.8% for 2012.

The central bank’s decision to raise rates was in part an attempt
to stem credit market imbalances thrown up by a surge in property
prices, which resulted in house values pushing back to pre-crisis
levels.

Recent data from Swedish real estate brokers, show that house
prices fell by 1% in May, while remaining flat on a 12-month basis.

In a report published last week, the International Monetary Fund
warned Sweden’s housing market was showing signs of a bubble and may be
on the verge of a sustained price decline.

“We estimate that house prices have peaked, and we believe that
interest rates are set to continue to rise. Therefore house prices will
probably continue to fall,” the IMF said at a press conference last
Wednesday.

The IMF also cautioned against an aggressive tightening of monetary
policy.

The minutes from the Executive Board’s monetary policy discussion
will be published on 18 July 2011. The decision on the repo rate will
apply with effect from 6 July.

— Frankfurt bureau: +49 69 720 142; Email: nmackie@marketnews.com

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