Sweden May Raise Key Rate to 12-Year High to Cool Inflation

By Johan Carlstrom

Sept. 3 (Bloomberg) -- Sweden's central bank may raise the benchmark interest rate to a 12-year high tomorrow to head off higher inflation, adding to pressures on an economy that is growing at the slowest pace in seven years.

The Riksbank will increase the seven-day repo rate a quarter point to 4.75 percent, according to 15 of 23 economists surveyed by Bloomberg. The others forecast no change. The bank will announce its decision tomorrow at 9:30 a.m. in Stockholm.

After lifting rates in July, the bank was split on the need for further increases, with three of six policy makers saying rates should rise twice more this year and three arguing that slower growth meant they could be left on hold. The inflation rate climbed to 4.4 percent in July, the highest in 15 years and more than double the 2 percent central bank target.

``The Riksbank board are inflation nutters and headline inflation at 4.4 percent is clearly worrying board members,'' Anna Raman, senior economist at Svenska Handelsbanken AB, said in a client note. ``Also, inflation outcomes have been a bit higher than the Riksbank forecast in July.''

Gross domestic product grew an annual 0.7 percent in the three months through June, the slowest pace in seven years. It may have continued to weaken in the third quarter, with unemployment rising to 5.8 percent in July from 5.4 percent a year earlier.

``Very weak activity, orders and employment conditions together with very low confidence raise clear concerns for growth,'' said Nicola Mai, an economist at JPMorgan Chase Bank in London, after a survey this week showed manufacturing industry contracted the most since 2001 in August.

Rising energy and food prices are pushing up inflation worldwide, even as economic growth slows, leading the European Central Bank to keep its key rate at a seven-year high of 4.25 percent tomorrow, according to all but one of 53 economists surveyed by Bloomberg.

Among the three policy makers in Sweden that favored further rate increases this year in July was Deputy Governor Svante Oeberg.

Oeberg said on Aug. 21 that there has been little change to Sweden's weak economic growth and high inflation, leading most economists to forecast the Riksbank would raise rates tomorrow.

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