Sweden’s central bank has joined the growing line of monetary authorities that have raised interest rates by a more aggressive half percentage point in response to rising inflation.
The Riksbank said that “price increases are spreading across the economy”, announced on Thursday that it will raise its main policy rate by 50 basis points to 0.75 percent, in line with market expectations, while signaling more increases this year.
The central bank said it would shrink its balance sheet faster than originally announced in April when it said it would buy SEK 37 billion ($ 3.6 billion) in bonds in the second half of the year, half the level in the first six months.
The interest rate increase followed an increase of 25 basis points in April and came in response to a sharp acceleration in Swedish inflation, which rose to 7.2 per cent during the year to May, the fastest increase in 31 years. The central bank’s target interest rate is 2 percent.
The Riksbank’s Board forecast that “the policy rate will be raised further and that it will be close to 2 per cent at the beginning of next year”. It said that Swedish inflation was expected to remain above 7 per cent for the rest of the year and that it aimed to “counteract the fact that high inflation is taking hold in pricing and wage formation”.
Analysts believe that the Riksbank will raise borrowing costs pending likely interest rate hikes from the European Central Bank and the US Federal Reserve in July, which could put downward pressure on the krona.
Sweden’s currency has fallen 11.6 percent against the US dollar and 3.8 percent against the euro since the turn of the year, which fueled increased inflationary pressures by raising import prices. Following the Riksbank’s announcement on Thursday, the krone rose slightly against the euro to 0.0936 euros.
“The Riksbank holds fewer meetings each year than other central banks, and this means that it must make everyone count,” analysts at ING said in a statement this week.
“The ECB is ready to raise twice before Swedish decision-makers meet again in September, and the Riksbank will want to take the lead – not least in view of the recent depreciation of the krona.”