By Simon Johnson
STOCKHOLM (Reuters) -Sweden’s central bank raised its key interest rate by half a percentage point to 3% 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, the first under new Governor Erik Thedeen, which surprised many in the market who had expected Thursday’s hike to be the last in this tightening cycle.
“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.
After a rapid series of rate hikes, central banks around the world are trying to gauge when to call a halt and ensure a soft landing for economies facing multiple challenges.
The Riksbank, which has raised borrowing costs from 0% a year ago, 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.
Thedeen said inflation was still “much too high” but the hawkish stance also reflects worries about a currency that has lost around 10% against the euro over the last year.
“We are … worried that a continued weak crown, which is at risk of becoming even weaker, could drive up inflation more than we have previously thought,” ” Governor Erik Thedeen told reporters.
HAWKISH STANCE
While it has to tread a fine line, balancing inflation and the crown against a slowing economy and tanking housing market, the central bank made clear that containing price pressures was its priority.
“I don’t think today that you can say there is a risk of crashes,” Thedeen said. “The big risk is that we won’t be able to keep inflation down.”
The Riksbank is under pressure to keep pace with rate hikes by the European Central Bank or risk a weaker currency and higher inflation.
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.
Nordea said it expected a quarter point hike from the Riksbank in April but added the door was now “wide open” for a bigger hike.
Markets now see the policy rate topping out around 3.5%
(Additional reporting by Johan Ahlander in Stockholm and Terje Solsvik in Oslo; editing by Niklas Pollard and Christina Fincher)