Sweden’s central bank raised interest rates by 25 basis points to 2.25 per cent on Tuesday and said that future increases may come faster than expected.

“It is possible there will be a need for slightly more rate increases over the coming year than recent market expectations have implied,” the Riksbank said.

Sweden’s economy is growing strongly due to a combination of robust exports and buoyant domestic demand. Consumer spending accounts for around 50 per cent of gross domestic product (GDP).

Economists said Tuesday’s statement implied that rates could reach 3 per cent by the end of the year following 25 basis point increases at each of the bank’s meetings in August, October and December.

They could rise to around 3.5 per cent next year as the bank continued a less expansionary policy, but at a more gradual pace, they said.

Jorgen Appelgren, chief economist at Nordea, said it was apparent the Riksbank was increasingly concerned about rapid rises in house prices as well as rising levels of household debt.

“They are leaning more towards asset prices than they did before,” he said.

The Riksbank drew attention in its statement to these issues, but emphasised inflation would remain within the 1 per cent band either side of its inflation target of 2 per cent for the next “couple of years”.

The central bank upped its growth forecast for 2006 to 3.7 per cent from 3.5 per cent and increased its forecast for consumer price inflation from 1.1 per cent to 1.5 per cent.

“The rise in inflation is being subdued by the fact that prices of imported goods are only rising marginally. Domestic inflation, on the other hand, is expected to rise relatively quickly in future, due in part to rising domestic cost levels as economic activity improves,” the bank said.

The central bank’s analysis of the country’s economic prospects is attracting particular attention ahead of national elections in September.

Opinion polls show the country split down the middle between support for the incumbent Social Democrats, who have been in power for the last 12 years, and the opposition conservatives.

A strong economy increases the probability voters may continue to support the Social Democrats as electorates rarely vote out governments that are able to claim to have boosted growth.

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