Elusive Inflation May Extend Sweden’s Negative Rate Era

(Bloomberg) -- Central bank policy makers in Stockholm could soon be forced to follow a growing number of their colleagues abroad in abandoning plans to tighten as inflation is starting to fade.

A key report at the end of this week is predicted to show that Swedish inflation once again fell below the 2% target, and is even slower when energy prices are factored out. An initial alarm could sound already on Wednesday, when Governor Stefan Ingves and his colleagues will get feedback on whether inflation expectations are continuing to weaken.

“Underlying inflation won’t live up to the Riksbank’s expectations,” said Johan Lof, an economist at Svenska Handelsbanken AB. “We expect it to slowly worsen, eventually forcing the Riksbank to cancel their planned rate hikes.”

Policy makers in Sweden raised rates in December and have since signaled they plan to finally end years of negative rates toward the end of this year. But they are now battling headwinds as global growth slows amid a trade dispute and as other central banks, including the European Central Bank, have started to again prime the stimulus pumps.

Riksbankers have so far kept a lid on any doubts, emphasizing that they’re not too concerned about whether inflation is a 10th above or below the target as long as expectations hold. That comes after a four-year barrage of stimulus to avoid deflationary spiral in the aftermath of the financial crisis.

They have some help from the krona, which has plunged as negative rates deter traders. A weaker krona raises import prices, which is expected to boost costs for consumers.

It will nevertheless be too little to help the Riksbank. Nordea Bank chief analyst Torbjorn Isaksson said the bank will likely not be able to raise rates again this cycle, with inflation cooling to as low as 1% after the summer.

“In this globalized world it’s structurally hard to get inflation to rise,” Isaksson said. “Sweden has globalized its economy and that’s had quite big effects for GDP, productivity and inflation. I think inflation will fall back later this year, during autumn, and that it will be considerably lower than what the Riksbank has in its forecast.”

Danske Bank Chief Economist Michael Grahn said inflation may disappoint more than expected already in May, impacted by foreign travel prices.

“Everyone knows that inflation is mainly held up by energy prices,” Grahn said. “The trend when it comes to underlying inflation is not pointing upwards. It’s going to be tough.”

Capital Economics sees the Riksbank keeping rates on hold until 2022 as weak growth hamstrings core inflation. David Oxley, senior Europe economist, said that the board would like to see inflation excluding energy rise toward the target, but that measure “really doesn’t seem to be showing any signs of life.”

For now, most analysts predict that the Riksbank will stick to its signal for a hike around the turn of the year at the next policy announcement on July 3 -- unless something major happens in the world that will force the board to reconsider.

But it will be difficult for them to disregard developments abroad, especially if the Fed has started to cut rates and pressure is growing on the ECB.

Ingves told reporters in Paris last week that domestic data has been “roughly in line” with expectations lately. While the Riksbank can’t ignore the actions of other central banks, he said there’s no automatic connection given that Sweden has its own currency and an independent monetary policy.

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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