Swedish central bank urged to delay rate hike by powerful unions

[STOCKHOLM] One of Sweden's most powerful union groups is calling on the Riksbank to delay its planned interest-rate increases.

The Swedish Trade Union Confederation says the bank's plan to deliver a rate hike as early as next month could hurt the labour market. The group pointed to Sweden's political gridlock as a key concern, with government formation efforts so far leading nowhere after the Sept 9 election.

"The risk associated with raising the rate too early and cool down the labour market and miss the inflation target is bigger than the risk associated with inflation ending up above the target for a shorter period of time," the nine economists who work at the confederation, known as LO, wrote in an op-ed in Dagens Industri on Tuesday.

The Riksbank has said it plans to raise the main rate by 25 basis points, either in December or February, from its current level of minus 0.5 per cent. That step depends on the pace of economic growth continuing to support inflation, it said.

But some economists have started to question the Riksbank's timing. At LO, economists warn that growth looks set to slow next year, as investments decline and exports slow. At the same time, unemployment is set to rise.

The uncertain economic picture is complicated by the political stalemate, with Swedes now having lived through a record 2 1/2 months without a government. (The country is currently being run by a caretaker Cabinet.)

"The deadlock in the government negotiations means that there's big uncertainty regarding fiscal policy," the LO economists said. "There should therefore currently be a lot of caution regarding rate increases."

BLOOMBERG