–Adds Repo Rate and Macroeconomic Forecasts, Additional Comments

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 “the weaker development of the economies of
the euro area means that the repo rate in the longer term is not
expected to be raised as rapidly as was previously assumed.”

After a “substantial” drop in GDP last year, “Swedish economy is
now recovering on a broad front and employment is increasing steadily,
although unemployment is still high,” the Riksbank said.

It noted, however, that “the uncertain public finances situation
abroad means at the same time that many countries need to tighten their
fiscal policy substantially to reduce their budget deficits. This
tightening is expected to dampen GDP growth in the euro area, which will
also hold back GDP growth and inflation in Sweden in the long run.”

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 afford to 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 raised
gradually thereafter. “He maintained that such a repo rate path results
in a better outcome for both resource utilisation and inflation, with
both lower unemployment and [consumer] inflation closer to the target,”
the bank explained.

The Riksbank projected that the repo rate would average 0.5%
throughout the third quarter, up from a previous forecast of 0.4%. The
average rate would then rise to 0.9% in the fourth quarter (up from 0.7%
previously), suggesting the bank could hike two more times this year,
though it stressed that it is not bound by its rate path forecasts. By
the third quarter of next year, the repo rate should average 2.1%, the
bank said. This was up slightly from its previous projection of 2.0%.

On the macroeconomic front, the Riksbank projected 2010 GDP growth
of 3.8%, up sharply from its April forecast of 2.2%. The revision was
due no doubt to a strong growth rebound in 1Q and significant upward
revisions for 3Q and 4Q of last year. For 2011, growth is seen at 3.6%,
slightly lower than the 3.7% previously projected.

The bank modified its inflation forecasts only slightly. It pegged
2010 consumer inflation at 1.2%, compared with an April forecast of
1.1%. In 2011, it sees CPI accelerating to 2.0%, compared with a
previous projection of 2.1%.

The Riksbank said another factor arguing for the rate hike was the
fact that one of three fixed-interest rate loans that had been provided
to Swedish banks in 2009 matured on Wednesday and will not be replaced
by new loans at a low, fixed interest rates.

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%

However, the Riksbank said it expected the krona to “strengthen
over the coming period.”

The rate increase announced today takes effect July 7.

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