Mhe biggest interest rate hike in decades is braced Sweden Central bank against escalating inflation. To the surprise of the financial world, it raised the key interest rate to 1.75 percent on Tuesday – an increase of a full percentage point. Economists had expected an increase of 0.75 percentage points. The currency watchdogs are reacting to the high inflation rate, which is currently 9.0 percent, with the largest jump in interest rates since November 1992. Many central banks around the world are currently increasing the price of money in the fight against inflation – above all the American Federal Reserve.
According to experts, it is facing the third major increase in a row on Wednesday. Most experts expect another increase of 0.75 percentage points, even if the financial markets an increase based on the Swedish model cannot be ruled out.
Unlike the Fed, which still has the opportunity to add more in November and December, the central bank in Stockholm was already under pressure at the penultimate interest rate meeting of the current year. Inflation in Sweden has now risen well above the two percent target set by the monetary authorities. And they reckon that the end has not yet been reached. The central bank therefore intends to raise interest rates further in the next six months. She assumes that the key interest rate will only reach a temporary peak of 2.5 percent in the second quarter of 2023.
At the same time, the central bank is preparing for the fact that economic output will shrink in the coming year. However, a far-reaching economic downturn is not to be expected, Riksbank boss Stefan Ingves countered such fears: “Basically, we are only talking about a dip in the economy.”
However, the interest rate signal from Stockholm had an unsettling effect on the financial markets, which were already nervous due to fears of a recession in many places. It unsettled investors in Europe and caused initial price gains to crumble away again.
At the same time, the monetary policy bang from Stockholm only gave the national currency a tailwind for a short time. In fact, the krona depreciated against the dollar recently to a new 21-year low of 10.8466 krone per dollar. On the one hand, the US Federal Reserve will probably follow suit with a strong interest rate hike on Wednesday, say stockbrokers. On the other hand, the world’s leading currency, the dollar, remains in demand as a “safe haven” because of the looming recession.
The interest rate hike was seen as a negative signal on the German stock market. Initial tentative price gains made way for significant losses. The market-wide FAZ index recently fell by 1 percent to 2026 points, the Dax by 0.9 percent to 12,688 points.
With the prospect of another sharp rise in interest rates in the USA on Wednesday, investors are hardly taking any more risks. Francois Rimeu of investment firm La Francaise expects Fed Chair Jerome Powell to remain focused on cutting the Fed inflation lays. “The Fed must continue raising interest rates despite the negative impact on the economy (…),” wrote the strategist. The labor market is too tight, there is a risk of a wage-price spiral.