The economy is developing strongly following the severe downturn.

• Nordic countries leading Europe out of crisis
• ‘Swedish economy on the road to recovery’
• Sweden's unemployment drops as GDP rises

Sweden's Riksbank, with governor Stefan Ingves, hikes its repo rate from record low 0.25 percent to 0.50 percent in a move to ensure stable growth in the real economy. The increase was expected.

"The recovery in the world economy is continuing. Trade between countries is increasing and this benefits Swedish exports and Swedish investments. Households have become increasingly optimistic and consumption is rising. Following the substantial fall in GDP, the recovery in the Swedish economy is now recovering on a broad front and employment is increasing steadily, although unemployment is still high", the Riksbank said in a statement.

However, the Riksbank warned that problems in other countries may have a negative impact on Swedish economic growth. This means that the repo rate in the longer term will not need to be raised as much as was previously assumed, the central bank said.

"The uncertain public finances situation abroad means at the same time that many countries need to tighten their fiscal policy substantially to reduce their budget deficits. This tightening is expected to dampen GDP growth in the euro area, which will also hold back GDP growth and inflation in Sweden in the long run".

The Swedish economy is on the road to recovery and poised to become the strongest in the Western world over the coming years, the National Institute of Economic Research said in a report last week.

The Scandinavian country was hard-hit by the global economic crisis but its economy quickly bounced back. The country's GDP increased by 3 percent in the first quarter compared to the first quarter of 2009; considerably stronger than expected.

The central bank now significantly increased its economic growth forecast for this year to 3.8 percent, up from 2.2 percent predicted in may, and said Sweden's gross domestic product (GDP) would grow 3.6 percent in 2011.

Inflationary pressures are currently low, but are expected to increase as economic activity strengthens. The Riksbank aims to attain an inflation target of 2 percent.