© Reuters. FILE PHOTO: The sign for Sweden’s central bank is pictured in Stockholm, Sweden, August 12, 2016. Picture taken August 12, 2016. REUTERS/Violette Goarant/File Photo
STOCKHOLM (Reuters) – Sweden’s central bank will hike its policy rate by a half a percentage point next week as it grapples with soaring inflation, with a further quarter point to come in June, a poll by Reuters showed on Friday.
Central banks around the globe have jacked up interest rates to tame levels of inflation not seen for at least 30 years and while tighter policy is beginning to bite and growth is slowing, their job is not yet considered done.
In Sweden, the pace of inflation slowed in March, but remains much too high and economists in the poll were almost unanimous in seeing a hike to 3.50% from the current 3.00% when the Riksbank announces its decision next Wednesday.
“Inflation is too high, the crown is weak and the economy is showing continued signs of strength,” Swedbank said in a note. “We think inflation tips the scales in favour of 50 (basis point hike) rather than 25.”
At its last meeting in February, the Riksbank tightened policy by 50 basis points and said it would hike by a further quarter or half percentage point at the April meeting.
Opinions about what the Riksbank will do after next week diverge.
The median forecast in the poll is for the policy rate to top out at 3.75% in the third quarter, but a higher or lower outcome is possible. Markets see the policy rate topping out close to 4.0%
The extreme pace of inflation – Riksbank Governor Erik Thedeen said recently it was “absurdly” far from the 2% target – argues for even tougher measures than current forecasts reflect.
The weak Swedish crown is also making the Riksbank’s inflation-fighting job more difficult.
The European Central Bank is expected to hike by only a quarter percentage point on May 4. However, analysts expect the ECB’s terminal rate to hit 3.75%, pressuring the Riksbank to at least match that level.
On the other hand, the economy is expected to slow sharply, while the rapid rise in interest rates over the last year has exposed problems in the global financial system.
Few expect another Lehman Brothers crash, but caution may be in order.
The median forecast in the poll showed the Riksbank starting cut rates at the start of next year.