On Thursday, the central bank in Sweden delivered an interest rate hike of half a basis point, which saw the interest rate rise to 3.0%.
The central bank also signaled further tightening in the next few months due to headwinds from a weakening currency and for combating stubborn inflation.
Soon after the announcement, there was a sharp rise in the Swedish crown, and markets were taken by surprise because they had expected Thursday’s hike to be the last of the central bank in this tightening cycle.
After delivering a quick series of hikes, global central banks are now trying to assess whether they can put an end to monetary tightening.
This could ease the pressure on households that are dealing with the cost of living crisis and allow economies to enjoy a soft landing.
A year ago, the borrowing costs in Sweden had stood at 0%, but the central bank has been hiking the rates to deal with inflation.
The central bank said that inflation was still too high, partly because the cost of imports was rising due to a weak Swedish currency.
The Swedish central bank said that if the currency continues to be weak, it would become difficult for the monetary authority to bring inflation down to its target.
It said that in this situation, they are hoping for a strong krona. Therefore, it forecast at least one more hike in the interest rate this year, after which it would keep the borrowing costs stable.
The Riksbank will also start selling government bonds in April because it wants to reduce its asset holdings as quickly as possible.
The central bank has to tread a rather fine line, as it has to balance the crown and inflation against a declining housing market and a slowing economy.
However, analysts said that Erik Thedeen, the new Governor of the central bank, was likely to maintain a hawkish stance.
Analysts said that the new governor has made it clear that they are determined to fight against the weak currency and inflation.
They are expecting the Swedish central bank to deliver two more rate hikes of 25 basis points each in its next meetings.
Some said that a 25 basis points hike would come in April, but the comments of the central bank show that it could also be bigger.
There has been a decline of almost 10% in the Swedish crown against the euro in the last six months, which has put the Riksbank under pressure to keep up with the tightening policy of the European Central Bank (ECB).
Earlier this month, the ECB had delivered a 50 basis points increase in the interest rate and had promised another similar hike in March. It might deliver another one in May.
Analysts had already predicted the 50 basis points increase that the Swedish central bank delivered for tackling the double-digit inflation.
However, they had expected 3.0% to be the peak rate and no further hikes to come.