Swedish Central Bank Hikes Interest Rate

On Thursday, the central bank of Sweden delivered an interest rate hike of half a percentage point, which saw the benchmark rate in the country go from 0.25% to 0.75%. The central bank also flagged more hikes ahead, as it is trying to get a grasp on inflation in the country that has hit a high of 30 years.

Inflation prompts tightening

Even though markets had widely expected the Swedish central bank to hike up the interest rates, it remains the biggest hike that the Riksbank has made in over two decades. The pace of inflation in the country has gone up due to price increases in everything, from fuel to food.

The Riksbank had to take a U-turn on its monetary tightening policy because of the price pressures brought on in the wake of the pandemic and then the Russian and Ukrainian conflict made it worse. Stefan Ingves, the Governor of the central bank, referred to it as the perfect storm.

He said that they had to hike the interest rate and they had to do it more than what they had discussed back in April. Until February of this year, Riksbank did not have any intention of making changes to its benchmark rate until 2024.

According to the Governor, the interest rates would reach 2% by the start of next year and would stay near the level, but they could also be more aggressive. He stated that if the situation calls for an increase of 75 basis points, then that is exactly what they would do. Inflation in Sweden reached 7.2% last month and is expected to increase more.

Markets see more hikes

According to markets, the Riksbank may have to tighten its policy further and may have to stick to it longer than what they currently plan, even though there could be a sharp slowdown in growth. Market analysts said that it is difficult to see that inflation will decline at the same pace that Riksbank had forecast.

In case it does not, then there will be additional rate hikes not just in the next year, but also in 2024. The target of the central bank is to keep inflation at 2%.

Following the footsteps of other banks

It should be noted that the Riksbank is not the only central bank in the world that has decided to prioritize inflation over growth. In its most recent meeting, the US Federal Reserve had hiked interest rates by 75 basis points and Norway had increased it by 50 basis points. Likewise, the European Central Bank (ECB) is also expected to do the same in the next month. The Bank of England had also hiked up its interest rates, although it was by 25 basis points only.

The decision of the Riksbank did not appear to have much impact on the Swedish crown, which included cutting down its balance sheet. This was the last meeting for the bank’s First Deputy Governor and there will be two more for Governor Ingves before he is also replaced.