The Swedish central bank on Thursday hiked its key interest rate by a quarter of a percentage point to 0.75 percent, citing a pickup in exports and an improved labor market.
The Riksbank said the rapid increase in world trade has boosted Swedish exports and investments, and that economic growth this year would be higher than previously expected — it is now predicting GDP growth of 4.1 percent, up from July's forecast of 3.8 percent.
"There has also been a substantial improvement in the labour market. Households are optimistic about the future, which is leading to an increase in consumption," the Riksbank said in a statement.
Central banks typically raise interest rates as the economy grows to prevent inflation, and lower them when growth is weak to stimulate more borrowing, spending and investment.
The Riksbank's assertions highlight the disparity among the economies in Europe, where countries in the north have recovered quickly from the global financial crisis while Spain, Portugal and Greece in the south are still struggling with high government debt and slow growth.
However, the Riksbank warned that modest growth in the eurozone and a more protracted recovery in the U.S. could dampen developments in Sweden too in the long run. It lowered its 2011 and 2012 growth forecasts to 3.5 percent and 2.6 percent from 3.6 percent and 2.8 percent, respectively.
Nordea Chief Economist Annika Winsth said the increase was in line with expectations and only had a minor impact on markets.
She said the Riksbank's revised outlook supports the belief it will continue increasing interest rates in October and December, but may not increase rates as much as it has forecast in the coming years.
The Riksbank has said it expects rates to climb to 3.1 percent in 2012 and to 3.8 percent by 2013.
"If the Riksbank increases on their own and the ECB says it will wait a little longer, we will have a stronger Swedish krona and that also reduces the need to increase (rates) in the long term," Winsth added.
The European Central Bank is set to leave interest rates untouched at 1 percent as it meets later Thursday.
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