BRUSSELS (MNI) – The Eurozone sovereign debt crisis poses the key
risk to the Riksbank’s tightening cycle, which began July 1, according
to minutes of the Swedish central bank’s July monetary policy meeting,
released Thursday.

At its July 1 meeting, the Riksbank increased its key repo rate 25
basis points to 0.5%, but the decision was split. Four of the six panel
members opted for a hike and two – Deputy Governors Karolina Ekholm and
Lars Svensson – voted to keep the rate steady at 0.25%.

The main debate, the minutes showed, was how to factor in problems
in the Eurozone economy: namely, how quickly the 16-nation currency bloc
could address its high debt and deficit levels and how this might hit
growth.

The Riksbank’s rate-setters have to balance a strong domestic
situation with the uncertainty and risks presented by difficulties
elsewhere, which could have an impact on Sweden’s relatively small and
open economy.

The Riksbank expects the Swedish economy to grow 3.8% this year,
and sees the main risks to growth as external, the minutes suggested.

“The uncertain public finances situation abroad means…that many
countries need to tighten their fiscal policy substantially to reduce
their budget deficits,” Riksbank Governor Stefan Ingves said in a
summary of the discussion, the minutes showed.

“This tightening is expected to dampen GDP growth in the euro area,
which will also hold back GDP growth and inflation in Sweden in the long
run,” he said. “This will contribute to the repo rate not needing to be
raised as much in the longer run as was forecast earlier.”

In spite of this, the minutes showed that the rate-setting
committee had concluded that “the repo rate now needs to be raised
gradually towards more normal levels to attain the inflation target of 2
per cent and to ensure stable growth in the real economy.”

The Riksbank’s next rate decision meeting is scheduled for
September. Most economists are predicting another 25 basis point hike.
The Riksbank’s rate path indicates hikes at both the October and
December meetings, with the key policy rate ending the year at 1% to
1.25%.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

[TOPICS: MT$$$$,M$$FX$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]