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Sweden's Riksbank Hikes Key Rate by 50 bps, Slashes Growth Forecasts

By Geoffrey Smith -- Sweden's Riksbank hiked its key interest rate by half a percent to 0.75% and slashed its growth forecasts for this year and next, warning that inflation is becoming entrenched across the economy.

The central bank also said that it will cut its planned bond purchases over the rest of this year by half, to 18.5 billion kronor ($1.8 billion), from a previous estimate of 37 billion kronor.

The Riksbank said after its regular policy meeting that it now expects inflation - which rose to a 31-year high of 7.3% in May - to remain above 7% for the rest of this year. It expects the CPI to remain above 7% through next year as well, before falling back to 2.7% in 2024.

"The risk of the high inflation becoming entrenched in price setting and wage formation has thus increased," it said. "The Riksbank therefore needs to use monetary policy to ensure that inflation returns to target."

That higher inflation is also eating into growth: the Riksbank now sees the Swedish economy growing only 1.8% this year, and 0.7% next year. It had earlier expected 2.8% and 1.4%, respectively.

Sweden is the latest in a series of central banks across the developed world to accelerate the tightening of monetary policy, surprised by the sharp rise in inflation that has followed the end of the pandemic and Russia's war in Ukraine. The bank now expects its key rate to be around 1.35% by the end of the fourth quarter, up from an earlier forecast of 0.80%. The rate will rise further to around 1.9% within 12 months, according to the bank's new forecasts.

The move had been largely expected, and the krona was little changed against the euro and the dollar immediately after the decision.

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