By Simon Johnson
STOCKHOLM (Reuters) – Sweden’s central bank raised its key interest rate by half a percentage point to 3.0% on Thursday and forecast further tightening in the coming months to combat inflation and headwinds from a weak currency.
The crown strengthened sharply after the announcement, which surprised many in the market who had expected Thursday’s hike to be the last in this tightening cycle.
After a rapid series of rate hikes, central banks around the world are trying to gauge when monetary tightening can come to an end, easing the pressure on households facing a cost of living crunch and ensuring a soft landing for economies.
Sweden’s central bank, which has raised borrowing costs from 0% a year ago, said inflation remained much too high, partly because the weak Swedish currency is driving up the cost of imports.
“If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target,” the central bank said. “In the current situation, a stronger krona would be desirable.”
The central bank forecast at least one more rate hike this year with borrowing costs then remaining stable.
From April, the Riksbank will also sell government bonds to reduce asset holdings at a faster pace.
While it has to tread a fine line, balancing inflation and the crown against a slowing economy and tanking housing market, analysts said the central bank under new Governor Erik Thedeen was likely to remain hawkish.
“Erik Thedeen has showed that he and this ‘new’ Riksbank board are determined in their fight against inflation and the weak krona,” Swedbank said in a note, adding it expected the bank to hike by another 25 basis points at its two next meetings.
Nordea said it expected a quarter point hike in April but added the door was now “wide open” for a bigger hike.
Sweden’s crown currency has lost almost 10% against the euro over the last six months, putting pressure on the Riksbank to keep pace with the European Central Bank in tightening policy.
The ECB raised its key rate by 50 basis points earlier this month and promised one more half-percentage point hike in March. It may even do more in May.
Analysts in a Reuters poll had been virtually unanimous in seeing a 50 basis point hike to underline the Riksbank’s commitment to tackling double-digit inflation.
However, the median forecast was for 3.0% to be the peak for the policy rate.
(Additional reporting by Johan Ahlander in Stockholm and Terje Solsvik in Oslo; editing by Niklas Pollard and Christina Fincher)
