–Leaves Repo Rate Path Unchanged, Sees Rate At 0.9% In 4Q
–Update adds analyst comment, more details

BRUSSELS (MNI) – Sweden’s central bank raised its key policy rate
25 basis points to 0.75% from 0.5% on Thursday, in line with analysts’
expectations, but left its forward looking rate path unchanged.

The central bank said inflation this year and next would be
slightly lower than it had previously thought and that growth would be
stronger this year but weaker in 2011 and 2012.

“The Swedish economy is continuing to show strong growth,” the
central bank said in a statement on its web site.

“The repo rate needs to be raised gradually towards more normal
levels to attain the inflation target of 2% and create the right
conditions for stable growth in the real economy,” it added.

Leaving the forward looking rate path unchanged from the July
meeting, the Riksbank projected the key repo rate at a level of 0.9% in
4Q this year, rising to an average 1.9% over 2011 and 3.0% over 2012.

“Riksbank is making a statement it will hike throughout 2010,” said
Erica Blomgren, a fixed income strategist at SEK in Stockholm. She said
there is now an 80% probability of a hike at the next meeting in
October. SEK predicts that the Riksbank will hike 25 basis points at
each rate setting meeting until the repo rate reaches 1.5% in February
2011.

The Swedish central bank has two more rate setting meetings before
the end of the year, one on October 26 and one on December 15. Most
economists expect 25 basis point hikes at each of the meetings on the
grounds that growth will be stronger than the Riksbank currently
projects.

The Riksbank raised its growth forecast for this year to 4.1% from
3.8%, but trimmed its forecasts for 2011 and 2012 on concerns that the
international economy could recover more slowly than expected.

It predicted that growth would be 3.5% in 2011, down from July’s
estimate of 3.6%, and 2.6% in 2012, down from July’s 2.8% prediction.

It also revised its inflation forecasts for this year down to 1.1%,
from 1.2% in July, and 1.9% next year, down from 2.0% in July.

“Inflationary pressures are currently low but are expected to
increase as economic activity strengthens,” the Riksbank said. It
adjusted upward its forecast for 2012 annual CPI to 2.5% from a previous
estimate of 2.4%.

The six members of the Riksbank’s board have to balance a strong
domestic recovery with a more uncertain international outlook.

While noting the strong domestic economy, the Riksbank said “there
are signs that the recovery in the United States will take slightly
longer than previously expected.”

“Continuing modest activity in the Eurozone and a more protracted
recovery in the United States are expected to dampen developments in
Sweden somewhat in the long run,” it said.

The decision to hike in September wasn’t unanimous: two of the
central bank’s six-strong board advocated a less hawkish stance.

Long-time dove Deputy Governor Lars Svensson entered a reservation
against the decision to raise the repo rate and against the repo rate
path, preferring a repo rate of 0.5%, the Riksbank statement said.

Deputy Governor Karolina Ekholm also dissented, advocating “a
flatter repo rate path with a repo rate at the end of the forecast
horizon that is around one percentage point lower than the adopted repo
rate path,” the bank said.

“Her main grounds for this were that weaker development abroad can
be expected to reduce growth and inflation in Sweden too in the period
ahead and that a slower increase of the repo rate should therefore bring
inflation closer to the inflation target and resource utilisation closer
to a normal level,” the Riksbank said.

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

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