STOCKHOLM (AFP) — The Swedish central bank raised its key interest rate by a quarter of a point to 4.50 percent on Thursday to contain inflation, and signalled further increases to come later this year.
"Inflation has risen substantially and is at its highest level since the mid-1990s," the Swedish Riksbank said in a statement, a few hours before the European Central Bank was expected to announce a quarter-point rise to 4.25 percent.
"The main reason for high inflation is that energy and food prices in the world market have increased so much."
The central bank said it judged that its key rate "needs to be raised now and on a couple of further occasions during the year."
The increase was the second this year.
Inflation in May rose to 4.0 percent on a 12-month basis from 3.4 percent in April, official data shows. This is twice the central bank's target of 2.0 percent.
The bank said: "Over the year the repo rate will need to be raised further on a couple of occasions to prevent the high inflation from becoming entrenched. A higher repo rate will mean that inflation declines and is close to the 2.0 percent target a couple of years ahead."
It explained: "Economic activity will continue to slow down and the labour market situation will slacken. The Riksbank's assessment is that resource utilisation will be normal at the end of the forecast period."
However, the bank warned that there was "considerable uncertainty" in its estimates of future trends and monetary policy would turn on how economic events unfolded abroad and in Sweden.
Inflation throughout Europe has risen sharply in recent months, reaching 4.0 percent in the rurozone. Meanwhile signs are accumulating pointing to a marked slowing of European economies, a force for disinflation at some future point.
Central banks affect mainly short-term market interest rates with their key rates. Longer-term rates are set by market forces in consideration of many factors, and notably judgements about how long-term inflationary pressures are being managed.
Sweden is a member of the European Union but not of the eurozone, for which interest rates are set by the European Central Bank in Frankfurt.
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