Sweden Raises Key Rate to 4.75% as Prices Accelerate

By Johan Carlstrom

Sept. 4 (Bloomberg) -- Sweden's central bank raised its benchmark interest rate to a 12-year high to head off faster inflation and said it expects to keep rates steady for the remainder of the year as the economy slows.

The Stockholm-based bank increased the one-week repo rate by a quarter point to 4.75 percent today, as forecast by 15 of 23 economists surveyed by Bloomberg. The others expected no change.

The Riksbank is concerned high oil and food prices will start to push up the cost of other products, making it harder to bring inflation back to the 2 percent target. Prices rose an annual 4.4 percent in July, the most in 14 years, even as the economy grew at the slowest pace in seven years in the second quarter.

``The Riksbank has clearly signaled that it has finished hiking rates,'' said Torbjoern Isaksson, an economist at Nordea Bank AB in Stockholm. ``We stick to our forecast that they will cut the rate in April next year but it could happen as early as February.''

The Riksbank said it expects the benchmark interest rate to average 4.5 percent in the fourth quarter of next year, indicating it will cut the rate by a quarter point by the end of 2009.

``The future repo rate path has been lowered,'' the Riksbank said in a statement. ``This is partly because the oil price and other commodity prices have fallen. Growth has slowed down more than expected both in Sweden and abroad.''

Inflation Forecast

The Swedish krona fell 0.2 percent to 9.4962 against the euro by 10:12 a.m. in Stockholm, from 6.5384 yesterday. Government bonds fell, with the yield on the 5.25 percent note due March 2011 gaining 5 basis points to 4.28 percent.

The central bank kept this year's headline inflation forecast unchanged at 3.9 percent. It lowered its estimate for 2009 to 3.2 percent from 3.5 percent and said price growth won't reach the 2 percent target until 2010.

The bank also cut its economic growth forecast for this year to 1.4 percent from 2.1 percent and to 0.8 percent for 2009 from 1.2 percent.

The minutes from the Riksbank's meeting in July showed that the board was split on the need to raise its benchmark lending rate further this year as economic growth slowed, after unanimously increasing the rate to 4.5 percent on July 2. The bank will publish the minutes from this month's meeting on Sept. 17.

Gross domestic product grew an annual 0.7 percent in the second quarter, down from 2.1 percent in the previous three months. 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.

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