Elusive Inflation Again Extends Era of Negative Rates in Sweden

(Bloomberg) -- Sweden’s central bank just can’t get enough inflation.

Having held their key interest rate at minus 0.5 percent, policy makers in Stockholm again pushed back a plan to raise interest rates for the first time in seven years, announcing on Thursday they don’t see a tightening until “towards the end of the year.” (That compares with an earlier assessment of “the second half of this year.”)

“It has taken a long time to bring up inflation and inflation expectations, and there is considerable uncertainty over the development of inflation,” the bank said. “Monetary policy thus needs to proceed cautiously. If the conditions for inflation were to change, the executive Board is prepared to adjust monetary policy.”

Inflation remains elusive in the largest Nordic economy, with the core price measure holding far below the 2 percent target at the tail end of a growth boom. The step back is likely to raise even more questions about the bank’s extreme policies. Critics argue that the stewards of a small economy can do little to stand up against the global forces that have pressed down inflation and are instead jeopardizing stability and debasing the currency.

The krona weakened 0.44 percent to 10.461 per euro as of 2:51 p.m. in Stockholm.

“This is a depressing read for those of us who think what the Riksbank is doing is nuts,” said Carl Hammer, head of global macro and FX at SEB AB. “It’s clear that the trend with a weak krona will now remain. How will it get out of the loop, how will it keep inflation high without the weak krona?”

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Led by Governor Stefan Ingves, the Riksbank’s board has invested all its credibility in anchoring inflation. Buffeted by extreme monetary policy abroad, Swedish policy makers have since 2015 been on an all-out mission to restore inflation, cutting rates deep below zero, snapping up a large chunk of the nation’s bonds and threatening currency interventions.

Handelsbanken senior economist Johan Lof noted a shift in the Riksbank’s rhetoric. The bank removed a line on that it was important that the krona doesn’t “appreciate too quickly" and also one on being “prepared to implement further monetary policy easing."

The bank did say that it was now important that the krona “develops in a way compatible with inflation stabilizing close to the target” and that it’s “prepared to adjust” monetary policy.

The krona has tumbled this year, reaching the lowest level against the euro since the financial crisis as inflation remains on shaky ground and the Swedish housing market rapidly deflates after years of surging prices. Inflation, excluding energy prices, was 1.5 percent last month, below the bank’s own 1.8 percent forecast.

As he did in February, Deputy Governor Henry Ohlsson entered a reservation against the decision to further delay normalization of the policy rate, again calling for an immediate quarter point increase in rates.

©2018 Bloomberg L.P.

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