BRUSSELS (MNI) – The Riksbank is expected to raise its key repo
rate by 25 basis points to 0.75% after its meeting on Thursday, with the
market focusing on whether the Swedish central bank will adjust its
forward-looking rate path, analysts said.

The Riksbank’s rate setters are struggling to balance a relatively
strong national economy with an uncertain international outlook. Sweden,
which has an open economy, is heavily dependent on exports to the United
States, Asia and its European partners.

“We expect the Riksbank to hike by 25 basis points and to maintain
its July rate path signalling 1.25% in end-2010 and 2.50% in end-2011,”
economists at SEB Bank said in a note to investors.

They also said they thought the Riksbank would “hike more
aggressively than the market pricing indicates.”

Since the Riksbank’s last rate setting meeting on July 1, when it
increased rates to 0.5% from 0.25%, many national indicators have come
in stronger than expected.

“Lead indicators suggest that strong economic activity in the first
half of the year is likely to continue in the second half, clearly
reinforcing the outlook of a self-sustained recovery in Sweden,”
Citigroup economist Tina Mortensen said.

“Combined with Riksbank concerns over strong housing and credit
growth, this clearly supports the central bank’s relatively front-loaded
interest rate approach,” Mortensen added. “We acknowledge the downside
risks to the global growth outlook, but maintain that, for now, these
are more than offset by upside risks to the Swedish economy.”

However, Mortensen was speaking a few days ago, before Wednesday’s
publication of the Swedish manufacturing PMI for August, which showed
that momentum may not be quite as strong as believed. The manufacturing
index fell 3.6 points to its lowest level since December 2009, a bigger
drop than the market had expected. The decline was propelled by a
10.3-point plunge in the output sub-index and a significant drop of 5.5
points in new orders.

That said, the overall manufacturing PMI was still at 60.6, a
robust figure that signals a healthy pace of continued recovery.

The Riksbank will publish its decision at 0730 GMT Thursday,
together with a monetary policy update report.

In its last set of forecasts, the Riksbank said it expected the key
repo rate to average 1.9% next year and 3.0% in 2012.

“New information supports the Riksbank’s view that the global
economy and the Swedish economy are recovering,” the central bank’s
First Deputy Governor Svante Oberg said in a recent speech.

“However, there are some signs of weakness in the United States and
Asia, while Europe looks slightly stronger than expected,” he added.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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