“Inflation is much too high and is spreading throughout the economy,” the bank’s governor, Stefan Ingves, said. “This is noticeable and expensive, both for households and others, and is creating uncertainty in the Swedish economy. That’s why we need to hike the rate.”
The central bank explained in a press release that a larger hike was required to “to ensure that inflation returns to target” and make it “clear to price- and wage-setters that the inflation target can continue to be used as a benchmark”.
Annika Winsth, chief economist at the Nordea bank, said that anything less than a so-called “double increase” would have left inflation to continue increasing.
“Anything else would have messed things up,” she said. “We have extremely high inflation, and also high domestic inflation. That’s why there’s a need to push back and the interest rate weapon is the tool the Riksbank has.”
“What we’ve seen today is no shock,” agreed Jens Magnusson, chief economist at SEB. “Anything else apart from this raise by 50 points would have been a shock. Inflation has taken off in a way the Riksbank hadn’t expected. The signal this gives is that the Riksbank takes it seriously and is trying to get a grip on the situation.”
In the press release, the bank said that prices for goods, food and services in Sweden had been increasing “considerably faster than expected” since the start of the year.
The imbalances that have arisen as a result of demand bouncing back from the pandemic faster than businesses ability to supply, it said, had been “reinforced” by Russia’s invasion of Ukraine and new pandemic-related restrictions in China.
“The high rate of inflation in Sweden and abroad is affecting households and is undermining purchasing power,” it concluded. “Central banks around the world are now tightening monetary policy to cool down economic activity and bring inflation down.”
The Riksbank said that companies had begun to raise prices “unusually strongly in relation to how much costs have increased”, which was causing inflation to accelerate faster than expected.
The bank said it was now predicting that its key interest rate would rise to 1.36 percent in the last three months of 2022, up from the 0.81 percent it predicted at the end of April.
Between the start of April and the end of June next year, it will rise to 1.9 percent (up for 1.18 predicted in April), and in the last six months of 2025, the rate will hit 2.06 percent, it predicted.
The central bank expects inflation to average at 7.6 percent over 2022 as a whole, up from six percent in its previous prognosis, falling to 7.1 percent in 2023.