Inflation hit 9% - a 30-year high - in August as the effects of soaring energy prices spread through the economy, and has overshot the Riksbank's forecasts.
The hike was the biggest since November 1992, when the Riksbank also raised its key rate by a full percentage point.
"By raising the policy rate more now, the risk of high inflation in the longer term is reduced, and thereby the need for greater monetary policy tightening further ahead," the central bank said in a statement.
A majority of analysts in a Reuters poll had forecast a 75 basis point hike on Tuesday, with only two expecting a full percentage point.
The Swedish crown was flat after initially rising on the rate announcement.
There is little the bank can do about the current level of inflation. But rate-setters do not want surging prices to spill over into higher wage demands, which would make the job of returning to the 2% inflation target much harder in the longer term.
Rate rises will continue despite forecasts Sweden's economy is heading for a sharp downturn - possibly even a recession.
The Riksbank forecast GDP would shrink 0.7% next year.
Rate-setters now see the policy rate peaking at around 2.5% in the second quarter of next year.
"We ... believe the policy rate will be higher than that and we don't exclude a peak of 3.5% at the end of 2023," Lars Kristian Feste, head of fixed income at Ohman Group said.
The Riksbank's forecast compares with June when the central bank said rates would reach about 2% early next year and then remain basically unchanged going forward.
Earlier this month, the European Central Bank tightened by 75 basis points, following two such hikes by the U.S. Federal Reserve, setting an aggressive tightening precedent for the Riksbank.
Analysts are betting there will be no let-up in the pace of hikes from the Fed and the ECB, while other central banks, such as the Swiss National Bank, are likely to follow suit with aggressive hikes.
(Reporting by Stockholm Newsroom; editing by Niklas Pollard and Susan Fenton)
By Simon Johnson
