Sweden and Norway to Extend Hikes as Pause Looms

(Bloomberg) — Sweden and Norway are poised to deliver increases in borrowing costs this week that may turn out to be the last in the current tightening cycle.

(Bloomberg) — Sweden and Norway are poised to deliver increases in borrowing costs this week that may turn out to be the last in the current tightening cycle.

The Riksbank in Stockholm and Norges Bank in Oslo are both expected to raise their key interest rates a quarter percentage point on Thursday, to 4% and 4.25% respectively, according to all but one economist surveyed by Bloomberg. 

Those likely hikes will punctuate a 36-hour sequence of global decisions, starting with the Federal Reserve on Wednesday, that could yet mark a grand finale for the global interest-rate cycle, with the US central bank seen pausing increases for now.

Neither Nordic central bank is likely to rule out further action in future, even though price pressures in their economies appear to have passed their peaks. Currency weakness could still force more tightening down the line, and investors will focus on officials’ projections for the paths of monetary policy.

Policymakers in each country were relieved by inflation easing more than expected last month after long exceeding projections, partly because the weakness of their currencies fueled imported price pressure. 

Both the Swedes and Norwegians — with some of highest household debt burdens globally, coupled with a high share of variable rate loans — have pulled back spending after showing some resilience to surging prices and credit costs.

“Both economies are experiencing weaker activity and have interest-rate sensitive households,” DNB Bank ASA’s senior economist Oddmund Berg said. “Since we believe demand and inflation to calm in the coming months, there will be no more hikes this cycle.”

The Riksbank is in a particularly complicated situation as fissures in Sweden’s highly leveraged real estate sector threaten to develop into a crisis with implications for the wider financial sector. So far, Governor Erik Thedeen and colleagues have signaled that they are more concerned about inflation than landlords defaulting on debts. 

Read More: Sweden Bets It Can Isolate Real Estate Risks to Troubled SBB

The case for further tightening has been strengthened by a spectacular deterioration in the value of the Swedish krona, which fell to a new record low against the euro this week, undoing some of the Riksbank’s efforts by making imported goods more expensive. That raises pressure on the Riksbank to keep its key rate a notch above the European Central Bank’s deposit rate, currently at 4%.  

Most economists surveyed by Bloomberg still expect no more Swedish hikes after Thursday, though DNB’s Berg said it is a “close call” whether the bank will tighten again in November.

What Bloomberg Economics Says:

“We currently see 4% as the terminal rate in the Riksbank’s tightening cycle. Risks to the rates outlook, though, are tilted to the upside. That’s based on the likelihood of the krona losing further ground, which would lift import costs and add to price gains. Under this scenario, a further hike (by a repeat 25 basis points) would on the table when the Executive Board meets in November.”

— Selva Bahar Baziki, economist. Click here to read more.

A signal for another hike could buoy the krona, but would also increase concern that the Riksbank is pushing Sweden’s economy to the brink. Some economists have already penciled in two years of contraction. 

Norway’s rate, meanwhile, is seen remaining at 4.25% for about a year.

The oil-rich economy is projected to be on track for a soft landing. The central bank’s regional network survey showed last week that output growth is expected to ease, driven by weaker construction activity and easing household demand. That’s partly offset by rising employment and a slower deceleration in wage growth than forecast earlier.

“Although we think the September meetings mark the end of the tightening cycle — supported by downward surprises to inflation last week — both central banks will likely keep the door open for further tightening into the fourth quarter,” JPMorgan Chase & Co.’s Scandinavian chief economist Morten Lund said by email. 

“Vulnerable currencies is the main reason for keeping a hawkish tone, although resilient labor markets (for now) also play a part,” he said.

–With assistance from Harumi Ichikura and Thomas Hall.

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