Sweden's central bank unexpectedly raised its key interest rate for the first time in over seven years on Thursday, as policymakers assessed that inflation was settling around the bank's target of around 2 percent, thus reducing the need for monetary stimulus. Looking ahead, however, the Riksbank said it will proceed cautiously as inflation remains lower than expected and there is uncertainty over the strength of inflationary pressures. The bank predicted that the next interest rate hike will probably occur during the second half of 2019. The Executive Board raised the repo rate by a quarter-basis points to -0.25 percent, which was the first hike since July 2011, in a split vote. "As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly," the Riksbank said. "The inflation forecast assumes that monetary policy stimulation will be decreased slowly," the bank added. In September, the central bank signaled that the repo rate would be raised by 25 basis points either in December or February. Economists had widely expected the bank to wait until February to raise rates.
The Swedish krona rallied following the announcement of the rate hike. In December, Deputy Governor Per Jansson entered a reservation against the decision to raise the repo rate and was not in favor of the repo-rate path. The policymaker cited the considerable uncertainty remaining over the strength of the more persistent rate of inflation. Hence, he saw no need to raise the repo rate at present, considering it better to await further information and proceed cautiously with an unchanged repo rate for now.
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