It is the first rate hike by Sveriges Riksbank since July 2011 but was expected by many analysts following the central bank's statement in October the rate would be raised either this month or in February next year.
"As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly," the Riksbank said.
The Riksbank had kept its rate steady since ending an easing cycle in February 2016 but took a first small step toward normalizing its policy stance in December 2017 by letting its asset purchase program expire.
The bond purchase program, known as quantitative easing, was first begun in February 2015 and the stock of assets reached 290 billion Swedish krona by the end of 2017. The Riksbank is still reinvesting the coupons and proceeds from maturing bonds "until further notice."
"The global economy, which has grown rapidly in recent years, is now entering a phase of more subdued GDP growth, which is in line with the Riksbank's earlier forecasts," the central bank said, adding there is still considerable uncertainty over the future, pointing to the effects of Britain's exit from the European Union (EU) and the trade conflict between the United States and China.
Sweden's economy cooled in the third quarter of this year with gross domestic product actually shrinking by 0.2 percent from the second quarter for annual growth of 1.6 percent but this was mainly because households and companies brought forward vehicle purchases due to changes in taxes.
The Riksbank said economic activity is still strong, sentiment in the corporate sector remains high and there are major shortages of labour, pushing up costs and inflation.
It forecast economic growth this year of 2.2 percent, down from its October forecast of 2.3 percent, and lowered its 2019 growth forecast to 1.5 percent from 1.9 percent, reflecting a general softening of global growth and demand for Swedish exports.
In 2020 and 2021 Sweden's economy is seen expanding an unchanged 2.0 percent and 1.8 percent.
To ensure strong economic growth, the Riksbank wants to keep its monetary policy expansionary and while inflation and inflation expectations are around its 2.0 percent target, it added that it has been lower than expected recently, illustrating uncertainty over inflationary pressures.
With the next interest rate increase seen in the second half of next year, the repo rate is forecast to average minus 0.2 next year, down from October's forecast of minus 0.1 percent.
"The forecast for the repo rate therefore indicates that the next rate rise will probably occur during the second half of 2019," the Riksbank said, adding after this the forecast shows approximately two rate rises per year by 25 basis points each time.
For 2020 the repo rate is seen averaging 0.3 percent, down from 0.4 percent and then 0.8 percent in 2021, down from 1.0 percent.
Headline inflation slowed in November to 2.0 percent from 2.3 percent in the previous two months and the Riksbank lowered its forecast for its favored measure of inflation - CPIF, or inflation with a fixed interest rate - to 1.9 percent next year from a previous 2.1 percent.
For 2020 CPIF inflation is seen averaging 1.8 percent, down from 1.9 percent and then 2.0 percent in 2021.
As in July and September, the Riksbank's 6-member board was split in its decision. This time Deputy Governor Per Jansson voted against the rate hike, arguing there is considerable uncertainty over the strength of inflation and there was no need to raise the repo rate now.
In July and September board members Henry Ohlsson and Martin Floden had wanted to raise the rates.
Sveriges Riksbank released the following statement:
"Economic activity is strong and the conditions are good for inflation to remain close to the inflation target in the period ahead. As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly. The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent. The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019. With a repo rate of −0.25 per cent, monetary policy is still expansionary and will thereby continue to support economic activity.
Economic activity entering a more mature phase with rising cost pressures
The global economy, which has grown rapidly in recent years, is now entering a phase of more subdued GDP growth, which is in line with the Riksbank's earlier forecasts. Cost pressures are gradually rising abroad, and monetary policy is moving in a less expansionary direction. However, there is still considerable uncertainty over global economic developments, not least with regard to the effects of Brexit and the trade conflict between the United States and several other countries.
Economic activity in Sweden is still strong, although GDP growth and inflation have been weaker than expected. The employment rate is historically high, companies are reporting major shortages of labour and cost pressures are rising. The strong economic activity has contributed to inflation rising gradually since 2014 and being close to the 2 per cent target in recent years.
Conditions remain good for inflation close to 2 per cent
Even though inflation has been lower than expected, the conditions remain good for inflation to stay close to the inflation target going forward. As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly. The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent. The inflation forecast assumes that monetary policy stimulation will be decreased slowly.
Monetary policy needs to proceed cautiously
It is important that economic activity continues to be strong and has an impact on price increases. With a repo rate of −0.25 per cent, monetary policy is still expansionary and will thereby also continue to support economic activity. The pacing of rate rises in the period ahead will be adjusted according to the development of the economic outlook and inflation prospects. The fact that inflation has been lower than expected recently illustrates that there is uncertainty over the strength of inflationary pressures. The forecast for the repo rate therefore indicates that the next rate rise will probably occur during the second half of 2019. After this, the forecast indicates approximately two rate rises per year by 0.25 percentage points each time. Reinvestments of principal payments and coupons in the government bond portfolio will continue until further notice.
Important with measures to reduce the risks associated with household indebtedness
The low interest rates are exacerbating the risks linked to high and rising household indebtedness, while the fundamental causes of the high indebtedness still remain. It is essential, to ensure that the development of the Swedish economy is sustainable in the long term, that measures are taken in housing policy and taxation policy and that macroprudential policy is designed appropriately.
| 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|
| CPIF | 2.0 (2.0) | 2.1 (2.2) | 1.9 (2.1) | 1.8 (1.9) | 2.0 (2.0) |
| GDP | 2.1 (2.1) | 2.2 (2.3) | 1.5 (1.9) | 2.0 (2.0) | 1.8 (1.8) |
| Unemployment, per cent | 6.7 (6.7) | 6.3 (6.3) | 6.3 (6.4) | 6.5 (6.5) | 6.6 (6.6) |
| Repo rate, per cent | –0.5 (–0.5) | –0.5 (–0.5) | –0.2 (–0.1) | 0.3 (0.4) | 0.8 (1.0) |
*Annual percentage change, annual averageNote. The assessment in the October 2018 Monetary Policy Report is shown in brackets.Sources: Statistics Sweden and the Riksbank
| 2018 Q3 | 2018 Q4 | 2019 Q4 | 2020 Q4 | 2021 Q4 | |
|---|---|---|---|---|---|
| Repo rate | –0.50 | –0.50 (–0.50) | –0.02 (0.09) | 0.48 (0.66) | 0.98 (1.23) |
*Per cent, quarterly mean valuesNote. The assessment in the October 2018 Monetary Policy Report is shown in brackets. Source: The Riksbank
Deputy Governor Per Jansson entered a reservation against the decision to raise the repo rate and did not support the repo-rate path in the Monetary Policy Report. Mr Jansson referred to the considerable uncertainty remaining over the strength of the more persistent rate of inflation and, given this, sees no need to raise the repo rate at present, considering it better to await further information and proceed cau-tiously with an unchanged repo rate for now.
The decision on the repo rate will apply from 9 January 2019. The minutes from the Executive Board's monetary policy meeting will be published on 9 January. A press conference with Governor Stefan Ingves and Jesper Hansson, Head of the Monetary Policy Department, will be held today at 11 a.m. in the Riksbank. Press cards must be shown. The press conference will be broadcast live on www.riksbank.se."
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