On Wednesday, the Central Bank of Sweden Riksbank raised its interest rate by
50 basis points to 3.5%. The rate hike was a continuation of a record series
witnessed in the Nordic countries and more widely in Europe. Many Central
Banks are still in the same boat, trying to tackle sticky inflation, and next week it
is the ECB’s turn.
Riksbank's interest rate hike was expected, and the Central Bank management
hinted that the peak of the interest rate cycle is gradually approaching. The
Executive Board of the Central Bank estimates that one 25 basis point hike would
still lie ahead in June or September. Two board members already voted for a
lower rate hike, so the monetary policy ship is starting to slow down. So far, the
tone of the Central Bank has been strict as inflationary pressures have not
seemed to be easing up. Minor changes in the views were especially reflected in
the currency market, where the Swedish krona weakened against the euro and
the dollar.
The Central Bank’s interest rate hikes have hit Swedes with mortgages hard, as
variable interest rates are common loan interests also in Sweden. According to
Bloomberg, the First Deputy Governor of the Central Bank, Anna Breman, said
already late last year that the interest expenses of the then anticipated 2.5%
interest rate adjusted by purchasing power corresponded to the same level as in
the 1990s, when the interest rate was 8%. Now that the policy rate is even one
percentage point higher, the interest charge has also increased further.
Like son, like father
The Swedish Central Bank's interest rate decision may be a premonition of ECB’s
decision to be announced next week. A 50 basis point hike to 4 % is also
expected from the European Central Bank while the interest rate cycle is
approaching its peak. The ECB may still have two interest rate hikes ahead of it,
while Riksbank anticipates one hike. This is largely determined by the direction of
inflation.
While some have already announced that inflation is yesterday’s news, the
Central Bank is not so sure. While the ECB has not mentioned wage development
as a particular risk factor, Pierre Wunsch, the Governor of the Belgian Central
Bank, said last week in an interview with FT that the rate hikes cannot stop until
wage increases slow down. In Q4, the increases accelerated to 5% and the
direction has been upward in the last quarters. Inflation has not shown signs of
stagnation in the service sector either and financial surprises have been positive,
so strong signals that would support interest rate hikes stopping have been
absent. I will discuss the ECB's interest rate decision in more detail next week.
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