Sweden May Raise Key Rate as Prices Jump the Most in 14 Years

By Johan Carlstrom

July 3 (Bloomberg) -- Sweden's central bank may raise the benchmark interest rate today to the highest in more than a decade, risking deepening an economic slowdown in a bid to cap inflation.

The Riksbank will raise its benchmark seven-day repo rate to 4.5 percent, according to 14 of 22 economists surveyed by Bloomberg. The others forecast no change. The bank will announce its decision at 9:30 a.m. in Stockholm.

Rising energy and food prices are pushing up inflation worldwide, prompting Norway to raise its key rate last week and the European Central Bank to indicate it may follow suit today. Swedish policy makers are also prioritizing inflation, which accelerated to the fastest pace in 14 years in May, even after economic growth slowed in six of the past seven quarters.

``The Riksbank will raise rates to show that it's taking inflation seriously,'' said Elisabeth Kopelman, an economist at SEB Merchant Banking.

Consumer prices rose 4 percent in the year through May, the fastest pace since December 1993 and twice the central bank's target. The economy grew an annual 2.2 percent in the first quarter, the slowest pace in four years.

Inflation and economic growth have been worse than the central bank expected when it published its monetary policy update in April, First Deputy Governor Irma Rosenberg said on June 13.

Slowing Down

The ECB will raise its benchmark rate to 4.25 percent today, according to all but one of 58 economists surveyed by Bloomberg. Inflation in the euro area accelerated to 3.7 percent in May from 3.3 percent the month before.

The slowdown in growth globally and in Sweden means any rate increase by the Riksbank today may be the last in this cycle.

Ford Motor Co. decided to cut 2,000 jobs mainly at its Volvo car business in Sweden last week. It follows similar cutbacks at Ericsson AB, the world largest maker of wireless networks, and TeliaSonera AB, Sweden's biggest phone operator, this year.

Retail sales declined 1.7 percent in April, the most in three years, as rising prices curbed consumer spending. Annually, sales rose 0.4 percent, the slowest in 10 years, from a revised 3.7 percent in March.

The Riksbank has indicated it will keep the key rate on hold until 2011 based on its economic growth forecast of 2.4 percent this year and 1.9 percent in 2009. The bank will publish new forecasts today.

``Going into the autumn we thus see little need to brake an economy that is already slowing faster than most had assumed, just to make up for high import prices,'' Svenska Handelsbanken AB said in a client note. ``Our view is therefore that the Riksbank will stop at 4.5 percent.''

To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net.