Sweden's Krona Falls as Riksbank Lowers Forecasts, Lifts Rates

By Bo Nielsen

Sept. 4 (Bloomberg) -- Sweden's krona fell against the dollar after the central bank said growth and inflation will slow in Scandinavia's largest economy, suggesting its next move will be a reduction in interest rates.

The Stockholm-based Riksbank today raised interest rates by a quarter-point to 4.75 percent, as forecast by 15 of 23 economists surveyed by Bloomberg, and said it expects to keep borrowing costs steady for the rest of 2008 as the economy falters. It expects the main rate to average 4.5 percent in the fourth quarter of next year, indicating it will cut the rate 25 basis points by the end of 2009.

``Despite the rate hike, the market is taking the downward revisions to the forecasts as confirmation the next step will be a cut,'' said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. ``The Swedish krona can't benefit from that.''

The Swedish currency fell 0.4 percent to 6.5616 against the dollar by 3:10 p.m. in Stockholm, from 9.4792 yesterday. It also traded at 9.4800 per euro, compared with 9.4792.

The Riksbank lifted rates to a 12-year high to head off inflation after the rate of price growth climbed to 4.4 percent in July, the highest in 15 years and more than double the 2 percent central bank target. The economy grew an annual 0.7 percent in the three months through June, the slowest pace in seven years.

`Increase is Necessary'

``Inflation has continued to rise in Sweden and the rate increase is necessary to prevent high inflation from becoming entrenched,'' the Riksbank said in a statement on its Web site. ``Economic activity will continue to slow and the labor market situation will slacken.''

The central bank kept this year's inflation forecast at 3.9 percent. It changed its forecast for 2009 to 3.2 percent from 3.5 percent. Consumer-price growth won't reach its target until 2010, it said.

Policy makers also cut their economic-growth forecast to 1.4 percent this year from 2.1 percent, and to 0.8 percent in 2009 from 1.2 percent.

Looking ahead ``Riksbank expectations for slower growth and weaker labor markets suggest this hike marks the peak of the tightening cycle,'' Thomas Stolper, a London-based Goldman Sachs Group Inc. analyst, wrote in a note to clients.

The European Central Bank and the Bank of England kept interest rates at 4.25 percent and 5 percent respectively to curb inflation even as growth in their economies slowed.

Swedish government bonds rose, with the yield on Sweden's 5.25 percent note due March 2011 losing 1 basis point to 4.21 percent. Yields move inversely to bond prices.

In other trading, Norway's krone fell to 5.5438 per dollar, from 5.5299 yesterday, and was at 8.0153 per euro, from 8.0175. A report tomorrow is forecast to show industrial production grew at an unadjusted annual rate of 4 percent in July, according to the median estimate of a Bloomberg survey of seven economists.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net