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Sweden's Riksbank Raises Key Rate by 1%, More Than Expected

By Geoffrey Smith -- Sweden's central bank raised its key interest rate by a full percentage point to 1.75% on Tuesday, setting an ominous precedent for a handful of other central bank meetings later in the week.

The move was larger than expected, with analysts having predicted an increase of only 75 basis points.

"Inflation is too high," the Riksbank said in a statement. "It is undermining households’ purchasing power and making it more difficult for both companies and households to plan their finances."

The bank now expects inflation to average 8.6% this year and to stay near that level next year, only returning to near its 2% target in 2024.

Against that backdrop, it warned it may keep raising the policy rate for the next six months.

The Riksbank is the first of a handful of central banks from advanced economies to hold a policy meeting this week, and its move is likely to spook markets awaiting similar decisions from the U.S. Federal Reserve, the Bank of England and the Swiss National Bank, among others.

The Swedish krona spiked higher on the news but quickly retraced, as markets priced in parallel steps from others such as the Fed and the European Central Bank. By 03:40 ET (07:40 GMT), the krona was down 0.2% on the day against both the dollar and the euro.

Gustav Helgesson, an analyst with Nordea, noted that the Riksbank's statement implied a relatively gentle further tightening of policy from now on. He expects the bank's next hike in November to be only 50 basis points, while the bank's own statement suggests a first rate cut from the middle of 2024. The Riksbank's statement said it expects the policy rate to average 2.5% through the next two years.

The bank argued that by raising rates sharply now, it reduced the risk of more extreme action later.

In another relatively dovish outcome, the Riksbank stuck with its current schedule for stopping its asset purchases only at the end of the year. The ECB, by comparison, has already ended its quantitative easing policy, while the Bank of England intends to start actively selling bonds from its QE portfolio back into the market this year.

Even so, Helgesson said in a note to clients that: "The swift tightening of monetary policy will hit the economy hard. This means that inflation will fall back too."

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