Economy

Sweden’s central bank surprises by raising interest rates by a full percentage

Sweden’s central bank surprises by raising interest rates by a full percentage

Written by Simon Johnson

STOCKHOLM (Reuters) – Sweden’s central bank raised interest rates a full percentage point to 1.75 percent on Tuesday in a surprisingly big move and warned that more was to come as it sought to control rising inflation.

Inflation hit 9% – a 30-year high – in August as the effects of higher energy prices spread through the economy, topping Riksbank’s expectations.

The increase was the largest since November 1992, when the Riksbank also raised its key rate by a full percentage point.

“By raising the policy rate further now, the risks of high inflation in the long run, and therefore the need for further monetary policy tightening in the future, are reduced,” the central bank said in a statement.

A majority of analysts polled by Reuters expected a 75 basis point increase on Tuesday, while only two expected a full percentage point.

The Swedish crown was flat after initially rising when the interest rate was announced.

There is not much the Bank can do about the current level of inflation. But rate-setters don’t want price hikes to extend to higher wage demands, which would make the task of getting back to the 2% inflation target much more difficult in the long run.

Interest rates will continue to rise despite expectations that the Swedish economy is heading for a sharp contraction – and possibly even a recession.

Riksbank expects GDP to shrink 0.7% next year.

Price makers now see the policy rate will peak at around 2.5% in the second quarter of next year.

“We believe … that the policy rate will be higher than that and we do not rule out a peak of 3.5 percent by the end of 2023,” said Lars Christian Fest, head of fixed income at Uman Group.

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Riksbank’s forecast compares to June when the central bank said interest rates would reach around 2% early next year and then remain essentially unchanged into the future.

Earlier this month, the European Central Bank tightened the noose by 75 basis points, after two such increases by the US Federal Reserve, setting a strong tightening precedent for Riksbank.

Analysts are betting that the pace of rises will not be let up by the Fed and European Central Bank, while other central banks, such as the Swiss National Bank, are likely to follow suit with a sharp hike.

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