Sweden hikes interest rate to 0.25% to counter inflation

Sweden’s central bank on Thursday raised its key interest rate from zero to 0.25 percent to counter soaring inflation linked to the Ukraine war and the Covid pandemic.

It was the first time the rate was in positive territory since September 2014 and came ahead of schedule, with the Riksbank’s most recent assessment from February forecasting a rise in the second half of 2024.

“The forecast is that the repo rate will be raised a further two to three times this year and will be somewhat below 2 percent at the end of the three-year forecast period”, the central bank said in a statement.

The global economy was still being affected by “major disruptions” caused by the Covid pandemic, and more recently Russia’s invasion of Ukraine, the bank said.

Global economic activity was “nevertheless judged to remain good”, the Riksbank added.

But high international commodity and shipping prices were expected to lead to high increases in consumer prices “for some time yet”.

While monetary policy cannot affect that, “the Riksbank can conduct monetary policy to counteract the high inflation becoming entrenched in price-setting and wage formation, and ensure that inflation returns to target after some time”.

Sweden’s CPIF inflation (consumer price index with a fixed interest rate), which the Riksbank uses as its target variable for its inflation target of 2 percent, was 6.1 percent in March.

The bank forecast CPIF would tick in at 5.5 percent for 2022, before dropping to 3.3 percent in 2023 and 2.0 percent in 2024.

The bank “is prepared to raise the repo rate faster if need to ensure that inflation returns to the target”, it said.