Swedish central bank hikes key rate, sees more tightening ahead

Sweden's central bank raised its policy rate by a quarter percentage point to 3.75% as expected on Thursday and said it had decided to increase the pace of government bond sales while forecasting at least one more rate hike this year.

Sweden's central bank raised its policy rate by a quarter percentage point to 3.75% as expected on Thursday and said it had decided to increase the pace of government bond sales while forecasting at least one more rate hike this year. Analysts in a Reuters poll ahead of the decision were unanimous in forecasting a quarter-point hike.

"The forecast is for the policy rate to be increased at least one more time this year," the Riksbank said in a statement. The Swedish crown, which has weakened sharply against the euro this year, saw volatile trade and briefly hit a fresh record low before recovering to trade on par with levels just before the decision by 0812 GMT.

Headline inflation in Sweden has started to come down but, at 6.7% in May, remains significantly above the central bank's 2% target. At its previous meeting in April, the Riksbank raised its key rate by a half percentage-point to 3.50% and said it expected to hike again by 25 basis points in June or September before drawing a line under its tightening cycle.

"In an almost Janus-faced fashion, the Riksbank switches back to showing its hawkish face, after what now turned out to have been temporary dovishness in April," analysts at Handelsbanken said in a note. "We stick to our forecast for two more 25 (basis point) hikes, in September and November."

Markets have been pricing in a further hike to take rates to 4% by year end. IN A BIND

The Riksbank said separately it was considering hedging part of its foreign exchange reserves as a way to reduce the Riksbank's financial risks. Bank SEB said in a note that the amount looked modest and was unlikely to stop the weakening trend for the crown. "However it is a sign that the weakened exchange rate is pressuring Riksbank and more measures could be implemented," SEB said.

The Riksbank said increased government bond sales from September could contribute to a stronger currency but added that if monetary policy needed to be tightened further, policy rate rises were "the main and most effective tool". After cranking up rates over the past year, global policy-setters are balancing the need for more hikes, to make sure inflation drops back to target, against the risk of smothering already slowing growth.

Since rate hikes work with a lag and some economies are more sensitive to tighter policy than others, it is not a straightforward job, but most central banks have put inflation-fighting ahead of growth worries. The Federal Reserve has paused its hikes for now, but sees more tightening by year end, while the European Central Bank has also signalled more hikes to come.

The Riksbank is in a bind. Parts of Sweden's economy are strong, but heavily indebted households - and commercial real estate firms - are highly sensitive to interest rate changes and are struggling.