Riksbank Lifs Interest Rate By 50 Bps; More Hikes To Follow

(RTTNews) - Sweden's central bank raised its interest rate by half a percentage point on Thursday and signaled further tightening this year as inflation is forecast to remain above 7 percent throughout this year.

The Executive Board of Riksbank decided to lift the policy rate by 50 basis points to 0.75 percent from 0.25 percent. The board said the policy rate will be lifted further and it will be close to 2 percent at the start of 2023.

The bank had previously raised its benchmark rate by a quarter-point in April, which was the hike since January 2020.

Policymakers observed that prices rises are spreading through the economy and the bank intends to bring inflation back to the target and to counteract the high inflation becoming entrenched in price setting and wage formation. Consumer price inflation accelerated to 7.3 percent in May, the strongest in 31 years. The central bank expects inflation to remain above 7 percent for the remainder of the year.

Inflation is expected to fall back next year and be close to 2 percent from 2024. The central bank today raised its inflation forecast for 2022 to 7.6 percent from 6.0 percent and that for next year to 7.1 percent from 5.0 percent.

Further, economic growth outlook for this year was downgraded to 1.8 percent from 2.8 percent, and the 2023 projection was halved to 0.7 percent from 1.4 percent.

The board also decided that, in the second half of the year, asset holdings of the central bank shall shrink faster than was decided in April.

Although the interplay between "QT" and rate hikes is complex, the fact that policymakers have also accelerated plans for "QT" is another reason to think that the Riksbank may not have to hike rates as extensively as many central banks, David Oxley, an economist at Capital Economics, said.

ING economists said the Riksbank is likely to stick to its hawkish rate path in September.

But the November meeting has a bigger question mark surrounding it, given mounting fears of a global recession (or at least a slowdown) and the prospect of other influential central banks pausing their tightening cycles towards the end of the year, they said.