Inflation Slowdown Is Again Stalking Sweden's Central Bank

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Central banks across the world are grappling with the mystery of how to bring back inflation and there are few places where the struggle has been as profound as in Sweden.

This week, policy makers in Stockholm are meeting as price growth has slipped far below their estimates and their 2 percent target. Just a few months ago, they raised rates for the first time in seven years, plotting a path out of negative rates this year amid growing confidence they had managed to restore credibility in their inflation regime.

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But on Thursday they will likely be forced to again lower their rate outlook, potentially pushing back an increase signaled for September and prolonging an era of negative rates. Led by Governor Stefan Ingves, the bank is also expected to extend its bond purchases (by pre-reinvesting bond maturities) beyond June, while keeping the benchmark at minus 0.25 percent.

Inflation pressure has “definitely been lower than the Riksbank counted on” said Torbjorn Isaksson, chief analyst at Nordea Bank Abp. “There are fewer and fewer economic arguments for the Riksbank to raise rates.”

As global and European growth loses momentum, Sweden’s economy is cooling and unemployment is forecast to rise. A global reassessment of monetary policy, led by the Federal Reserve halting its hiking cycle, is weighing on the Riksbank’s plans to tighten. The European Central Bank is planning more stimulus as it expects its key rate to be unchanged at least through 2019.

Nevertheless, policy makers in Sweden have a lot invested in their exit out of so many years of negative rates and they surprised markets in February by sticking to their plans. The krona has tumbled this year, giving the Riksbank more room to raise rates. Some on the board, including Deputy Governors Cecilia Skingsley and Martin Floden, have also flagged that they are willing to live with inflation that holds just below the target, as long as expectations stay anchored around 2 percent.

According to SEB AB, the main scenario is that the rate path will indicate a slightly later hike but that the Riksbank will maintain that an increase will come “during the second half of the year.”

But unemployment surprised negatively in March and the number of jobless seems to have bottomed, according to Svenska Handelsbanken AB’s Chief Economist Christina Nyman.

“Unless there’s considerable inflation pressure, it’s going to be a challenge if you are at about to raise rates and you at the same time have rising unemployment numbers,” she said.

QE Extended

Policy makers have also said they will provide the next step forward on what to do with their bond purchasing program. Opinion is divided, but the main outcome could be continued purchases at a slower pace than the recent 20 billion kronor per year.

Here’s what the economists say:

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Amanda Billner in Stockholm at abillner@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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