Sweden again hikes interest rate amidst export-led recovery

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The Riksbank upgraded its own prediction for Swedish economic growth this year to 4.1 percent from 3.8 percent, while lowering its 2011 estimate to 3.5 percent from 3.6 percent; and to 2.6 percent from 2.8 percent for 2012.

“Continuing modest activity in the euro zone and a more protracted recovery in the United States are expected to dampen developments in Sweden somewhat in the long run,” it said in a statement.
For now, however, the Swedish economy “is strong across the board,” said Annika Winsth, chief economist at Nordea Bank AB.

“The export industry took a beating during the financial crisis but households, the service and public sectors remained strong throughout. The global recovery has meant that the export sector has now joined the fray.”

Even after four years of tax reductions, Swedish features the EU’s smallest budget deficit.

Winsth believes the central bank will also raise rates in October and December to finish at 1.25 percent ay year-end.

Ben May, European economist at Capital Economics, said that the krona, the Swedish currency, looks poised to continue advancing against the euro, given the Riksbank's commitment to keep tightening amidst a backdrop of persistent fiscal problems throughout the euro-zone.

 The bank also estimated that consumer prices will increase 1.1 this year, 1.9 percent in 2011 and 2.5 percent in 2012. Unemployment will peak at an average 8.5 percent this year, before falling to 7.9 percent in 2011 and 7.6 percent in 2012,.

Winsth added that inflation will accelerate since wage increases will be “significantly higher” in 2011 than this year due a lack of qualified labor, while energy and raw material prices will also climb.

Capital Economics' May express some caution about Sweden;'s near-term prospects.

“While we agree that Sweden is set to outperform most of its European peers, we continue to pencil in a slightly weaker recovery,” he said.

“We expect the economy to expand by about 3.5 percent this year, 2.0 percent or so in 2011 and around 2.5 percent in 2012. After all, inventories are likely to provide the economy with much less of a boost over the coming quarters as firms return their stocks to more normal levels.”

In addition. May states, the export upturn is bound to slow as the global economic recovery loses momentum and the effects of the strong krona start to bite.