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Riksbank Sees Rate Hikes On The Horizon

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Sweden's central bank said on Wednesday that it is set to raise interest rates at the end of this year or early next year, as inflation is on target and economic activity remains strong.

"If the economy develops in a way that continues to support the prospects for inflation, the Executive Board assesses that it will soon be appropriate to start raising the repo rate at a slow pace," the Sveriges Riksbank said as it left the repo rate unchanged at a record low -0.50 percent, as expected.

"The forecast for the repo rate is the same as in September and indicates that the repo rate will be raised by 0.25 percentage points either in December or February," the bank added.

Deputy Governors Martin Floden and Henry Ohlsson entered reservations against the decision to hold the repo rate unchanged and advocated raising the repo rate to -0.25 percent.

Swedish interest rates entered negative territory in early 2015 and the benchmark repo rate has been at its current level since February 2016.

Economic developments and forecasts were largely unchanged from its September policy session, the bank noted, adding that there are signs that inflationary pressures are rising.

The conditions are good for inflation to remain close to the target of 2 percent in the coming years, the bank said.

Stressing that the krona exchange rate needs to develop in a manner compatible with inflation remaining close to target, the Riksbank said, "Monetary policy needs to proceed cautiously and be expansionary for a long period of time to come."

The repo rate was forecast to remain at -0.50 percent in the final three months of this year, and at -0.33 percent in the first quarter of 2019. The rate is seen returning into positive territory at 0.09 in the final quarter of next year.

The central bank forecast inflation to be 2.2 percent this year, 2.1 percent next year and 1.9 percent in 2020. These were unchanged from the September monetary policy report. Price growth was projected at 2 percent in 2021.

However, the bank trimmed the growth forecast for this year to 2.3 percent from 2.9 percent and the projection for next year to 1.9 percent from 2 percent. The outlook for 2020 was cut to 2 percent from 2.1 percent and growth was seen at 1.8 percent in 2021.

"The fact that there is no indication that a December hike has become more likely, which to some extent had been expected after the strong September inflation reading, means today's stance is very marginally more dovish than anticipated," ING economist Jonas Goltermann said.

A rate hike decision would likely be based largely on the data between now and the December meeting, the economist noted. ING still sees the Riksbank's forecast for GDP as somewhat on the optimistic side.

"Combined with further turbulence on global markets, this suggests to us that the cautious majority on the Riksbank board are likely to push the first rate hike into February, but it is a close call," Goltermann concluded.

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