Swedish central delivers half-point hike, says more needed to tame inflation

STOCKHOLM (Reuters) - Sweden's central bank delivered a half percentage point interest rate hike on Thursday, taking the benchmark rate to 0.75% from 0.25%, and flagged further sharp tightening ahead as it seeks to get to grips with inflation running at a 30-year high.

The rate hike, while widely expected by markets, was the Riksbank's biggest in more than two decades.

Price rises from fuel to food have pushed up the pace of inflation in the wake of the pandemic and Russia's invasion of Ukraine, forcing the Riksbank into an abrupt U-turn on policy.

"It's a bit of a perfect storm," central bank Governor Stefan Ingves told reporters. "We need to hike the rate and we need to hike the rate more than we thought when we talked about monetary policy in April."

As late as February this year, the Riksbank had forecast no change in the benchmark rate until 2024.

Ingves said rates would hit about 2% around the beginning of next year and stay close to that level, but did not rule out more aggressive action if needed.

"If the situation requires 75 basis points some time in the future, we will raise by 75 basis points," he said.

Inflation hit 7.2% in May and is likely to pick up further.

Markets see the Riksbank needing to tightening more and for longer for longer than the current plan, even though growth is set to slow sharply.

"We...have a hard times seeing that inflation will fall back as much as is the case in the Riksbank's forecast," Lars Kristian Feste, Head of Fixed Income at Ohman Group, said.

"If it doesn't, we have to expect further hikes during 2023 and maybe even in 2024."

The central bank targets 2% headline inflation.

The Riksbank is not alone in setting aside worries over growth to focus on inflation. The U.S. Federal Reserve raised rates by 0.75 percentage points at its most recent meeting and Norway by 50 bps points.

The European Central Bank is set to raise interest rates for the first time in a decade next month, though the hike is expected to be by a quarter-point.

The Swedish crown was broadly unaffected by the Riksbank's decision, which included shrinking its balance sheet at a faster pace.

It was the last rate-setting meeting for First Deputy Governor Cecilia Skingsley, while Governor Ingves only has two more before he is replaced by current FSA chief Erik Thedeen.