Swedish central bank hikes key interest rate, more to come this year

The Riksbank has been caught by surprise by price rises, which have climbed higher and proved more persistent than it and many other central banks forecast.

As recently as February, the Riksbank had expected price pressures to be short-lived, saying it would not need to hike rates until 2024.

Now the Riksbank sees two or three more rate hikes this year and said it would also allow its balance sheet to shrink this year, another policy shift.

“The Board‘s forecast is that the repo rate will be raised gradually going forward and that it will be somewhat below 2 per cent in three years’ time,” the central bank said in a statement.

Analysts at banking group Nordea said their first impression was that the Riksbank had become “hawkish”.

Russias invasion of Ukraine, which Moscow calls a “special military operation”, has added upward pressure to prices, already on the rise due to the lingering effects of the pandemic, with inflation hitting its highest level in decades.

Inflation ran at 6.1% in March, far above the Riksbanks 2% target.

Some central banks, like the U.S. Federal Reserve and the Bank of England, have started hiking rates. Others, like the European Central Bank, are expected to follow suit.

But there are reasons to be cautious.

The war in Ukraine is clouding growth prospects, inflation is eating away at household purchasing power and higher mortgage costs are likely to hit consumption. Meanwhile, there is little central banks can do about higher energy prices.

It is also far from clear whether there has been a permanent shift in inflation to higher levels. Some analysts believe central banks may relatively soon face problems getting inflation up to target again rather than bringing it down.

The Swedish crown strengthened sharply after the Riksbanks announcement.