“The Swedish economy is growing at a record rate. The international recovery is continuing, although concern over public finances in Europe has increased. Underlying inflationary pressures are still low in Sweden, but are expected to increase as economic activity strengthens,” the Riksbank said in a statement.
The move marks the fourth consecutive boost for Sweden's benchmark interest rate, bringing it back to a level not seen since February 2009 when the Riksbank slashed rates from 2 percent to 1 percent.
Analysts had widely predicted the move following a series of reports indicating that the economic recovery in Sweden is continuing apace, with 18 of 20 analysts polled by the Reuters news agency expecting the Riksbank to raise rates a quarter point.
"This was completely inline with my expectations," said Annika Winsth, chief economist with Nordea bank, to the TT news agency.
Last week, a report from Statistics Sweden (SCB) showed that inflation rate rose to 1.8 percent in November, compared 1.5 percent in October. Analysts had expected prices to rise by only half as much.
According to the Riksbank, Sweden's economy is at the start of a period of solid growth expected to last through 2013.
The bank raised its forecast for GDP growth in 2010 from 4.8 percent to 5.5 percent, with growth in 2011 expected to reach 4.4 percent, up from the previous forecast rate of 3.8 percent.
Sweden's GDP growth is expected to mellow to 2.3 percent in 2012 before picking up slightly again in 2013 to 2.4 percent.
In taking a positive view of developments in the Swedish economy, the Riksbank nevertheless admitted that a strong global recovery was far from certain.
“While the recovery is continuing in many regions of the world, developments are uncertain for instance in Europe as a result of concern over public finance problems. The outlook in the United States has improved, although there is still uncertainty regarding the housing market and the labour market is still weak,” the Riksbank said.
The Riksbank also downplayed inflationary pressures in the Swedish economy, citing low labour costs. However, the bank added it expects inflationary pressures to rise as economic activity improves.
Looking ahead, the bank explained it had no plans to change the repo rate path it presented in October, which forecasts the rate to reach 2 percent by the end of 2011, 2.9 percent by the end of 2012, and 3.4 percent by the final quarter of 2013.