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. Last Updated: 07/27/2016

Sweden Bucks Trend, Lifts Rates

STOCKHOLM, Sweden -- Sweden's central bank raised interest rates Tuesday and said further rises were likely in the face of persistently high inflation, becoming the first major central bank to tighten monetary policy since the end of 2000.

The Riksbank said it was increasing the key repo rate, which sets the floor for the interest commercial banks charge on household mortgages and car loans as well as corporate credits, to 4 percent from 3.75 percent.

Riksbank governor Urban Backstrom told parliament further rate rises could be in the pipeline as inflation looked set to accelerate to levels above its 2 percent target.

Backstrom said inflation is "expected to approach 2 percent in the early summer. After that, however, it is foreseen that the more strained resource utilization connected with stronger economic activity will lead to a renewed increase in inflation."

Sweden's shift to a tighter monetary stance, widely expected by financial markets, could herald similar changes in policy in other countries after the global monetary policy easing in 2001 that was aimed at reviving a synchronised slowdown in the world economy.

The rate change, already priced in, made no impact on the crown but bond yields rose to two-year highs as traders focused on the bank's further tightening bias.

"You can detect a slight upside risk in the report which can be interpreted ... that another rate rise will follow soon," said Sven-Arne Svensson, chief analyst at the brokerage Aragon.

"But I think that inflation will slow in the next few months and that a rate rise will come only in the third quarter."

The Riksbank's main monetary policy target is to keep underlying inflation (UND1X), which excludes mortgage interest costs as well as taxes and subsidies, at on average 2 percent over a business cycle of 12 to 24 months.

But the UND1X index has been above three percent for seven months running and the bank said that above-target price growth coupled with expectations of economic recovery in Sweden and abroad prompted it to raise the cost of borrowing.

In the first inflation report of this year, released at the same time as the rate decision, the Riksbank revised upward its forecast for the UND1X 12 months ahead to 2.2 percent from 2.0 percent forecast in December.

It forecast UND1X would still be running at 2.2 percent in two years' time. The bank said an upside risk spectrum implied a possibility of the UND1X accelerating to 2.3 percent.

The Riksbank also revised its forecasts for Swedish gross domestic product growth, saying the economy would grow more slowly at 1.6 percent this year against an earlier forecast of 1.8 percent, and 1.2 percent in 2001.

But the rebound seen for 2003 would be more rapid at 3.0 percent rather than 2.4 percent.

"GDP growth is judged to be 1.6 percent this year and then accelerate to between 2.5 and 3 percent in the coming years, which as far as can be judged is somewhat more than the Swedish economy can sustain in the longer run without giving rise to inflationary tensions," Backstrom said.

"If economic activity continues to strengthen as expected ... it is ... reasonable to assume that the level of interest rates in Sweden will be adjusted successively upwards," the Riksbank said.