PARIS (MNI) – Sweden’s Riksbank decided at its monetary policy
meeting Wednesday to hike its key repo rate 25 basis points to 0.5%, the
central bank announced Thursday.

The markets had expected the hike after the bank said following its
April meeting that it would raise rates in summer or autumn and begin
“to gradually move towards a more normal monetary policy.”

The bank’s board considered raising the rate in April, but decided
to hold off.

Since then, data have shown the Swedish economy rebounding robustly
in the first quarter, with significant upward GDP revisions for the
second half of 2009 as well. Housing prices remain dynamic, and
unemployment fell sharply in May.

“The Swedish economy is developing strongly following the severe
downturn. The repo rate now needs to be raised gradually towards more
normal levels to attain the inflation target of 2% and to ensure stable
growth in the real economy,” the Riksbank said in a statement announcing
the rate hike decision.

However, it added that, “economic growth abroad is expected to be
lower, which means that the repo rate in the longer term will not need
to be raised as much as was previously assumed.”

Deputy Governor Karolina Ekholm opposed the decision to raise rates
given “the increased uncertainty prevailing as regards the sovereign
debt problems in the euro area,” the Riksbank noted. It said Ekholm had
argued that the central bank could hold off on tightening “without
compromising the inflation target” due to “the relatively low inflation
pressure.”

Deputy Governor Lars Svensson also dissented, arguing that the repo
rate path should stay at 0.25% through the end of 2010 and be raised
gradually thereafter.

The Swedish currency dropped despite the rate hike announcement
because of the Riksbank’s comment that the repo rate would not have to
rise as much as previously thought. Euro-Sek gained over three full
points in knee-jerk reaction to hit Sek9.5819, a session high. The yield
on the 10-year benchmark Swedish bond fell 1bps to 2.64%

The rate increase announced today takes effect July 7.

[TOPICS: M$X$$$,M$$EC$,MT$$$$,MGX$$$]