The Swedish central bank explained that it has raised the interest rate by 25 basis points to combat rising inflation, adding that there were risks linked to slower economic activity and financial market turbulence.

The bank has kept its options open, by explaining that future monetary policy decisions will be based on data that is released, but did advise that interest rates are expected to remain steady for this year.

The move saw the Swedish krona rise from 6.4275 from a price of 6.4785 prior to the news release.

The Riksbank’s goal is to hold inflation to less than 2.0 percent. Inflation has risen over the past year and stood at 1.6 percent in May, but was projected to rise further over the next two years, the bank noted.

“To ensure an inflation rate close to target and contribute to a balanced development of the real economy, monetary policy should become gradually less expansionary,” the bank said Tuesday, motivating its decision.

The higher rate of price increases was partly due to external factors such as rising energy prices, but the bank also cited rising household debt and rapid increases in housing prices in Sweden as causes for concern.

Looking ahead, the bank said economic activity was expected to remain good.

It forecast that gross domestic product (GDP) would rise by 3.7 percent this year, revised upward from a previous growth estimate of 3.5 percent.

Exports and investment would rise faster than previously expected, although consumer spending was now believed to be less buoyant than thought before, it said.

The continuing upswing would be accompanied by rising employment levels, further contributing to inflationary pressures.

“A couple of years ahead, inflation is expected to be in line with the inflation target of two percent,” the Riksbank said.

The bank raised its inflation forecast for 2006 to 1.5 percent from 1.1 percent earlier, and to 2.3 percent in 2007 from 2.1 percent.

These forecasts were based on expectations in Swedish financial markets, reflected in the level of forward contracts, that the repo rate would stand at 2.75 percent at the end of this year and just under 4.00 percent in 2009, the bank said.

But inflationary pressures made more aggressive rate hikes possible, it said.

“It is reasonable to assume that the repo rate will need to be increased further. It is possible that there will be a need for slightly more rate increases over the coming year than recent market expectations have implied,” it said.

Handelsbanken chief economist Peter Kaplan said the central bank’s view on inflation was unexpectedly hawkish.

“We believe this means that the repo rate will be raised another three times this year, and that it should reach 2.75 or 3.00 percent by the end of the year,” he told the TT news agency.

The repo rate was last changed in February, when it was also rose by a quarter point.

SOURCE: AFP