The Riksbank's Rate Hike-Unexpected But Justified

I must admit to being as surprised by the Riksbank's interest rate hike today as was all other analysts. While one member of the Riksbank board, Lars Nyberg, had warned that the market's expectations of future interest rates was too low, it seemed unlikely to imply a rate hike because it seemed that this statement was meant to refer to the expectations of interest rate cuts later this year.

However, unlike most other analysts I think the decision was basically justified. Money supply growth remains high and consumer price inflation have steadily risen and seemed certain to rise above the Riksbank's target of 2%, even excluding the effects of previous rate hikes and increased consumption taxes (on tobacco and diesel/gasoline) in view of the high money supply growth, the high union wage deals and the global commodity price boom. Moreover, there are strong indications that this have caused inflationary expectations to rise, as Riksbank chairman Stefan Ingves points out.

To do as the ECB, to hold interest rates unchanged or as the Federal Reserve cut them dramatic would have been highly irresponsible and would have meant that they would have violated their task of holding consumer price inflation at 2%. The current Riksbank board thus appear to be a lot more hawkish than not only the ECB and the Fed, but also a lot more hawkish than the board led by former Riksbank chairman Lars Heikensten, whose decision to lower interest rates to 1.5% in June 2005is a root cause of the current high inflationary pressures and the excess debt creation and house price increases of the last few years.