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Riksbank Tightening Plan Handed a Lifeline by Inflation Surprise

Riksbank Tightening Plan Handed a Lifeline by Inflation Surprise

(Bloomberg) --

The Riksbank’s plan to raise interest rates toward the end of the year was just handed a lifeline.

The last price data before its Oct. 24 rate announcement showed its preferred inflation gauge remained at an annual 1.3%. That was in line with the Riksbank’s own forecast and above the economists’ consensus estimate of 1.2%.

“After today’s inflation outcome the Riksbank is no longer 100% wrong in everything,” said Martin Enlund, head of FX strategy at Nordea Bank AB. The reading “boosts the chances of the Riksbank keeping its rate hike expectations alive in October.”

Riksbank Tightening Plan Handed a Lifeline by Inflation Surprise

Economists have been expressing growing skepticism over the Riksbank’s plans to end almost half a decade of negative rates in December or early next year. With inflation still well below the central bank’s target, the economy slowing and other central banks easing, analysts have been talking up the chances of another cut, rather than a hike.

Knut Hallberg an economist at Swedbank AB, said the September reading “is very positive for the Riksbank.” He now expects the board to stick to its hiking message at the upcoming monetary policy meeting. Lars Henriksson at Svenska Handelsbanken also said he sees a hike as more probable than a cut.

“The market needs to price out all likelihood of a rate cut,” Henriksson said. “If any, we still see a bigger probability for a hike than a cut, even as the probability of a hike is low.”

What Bloomberg’s Economists Say:

“Stable inflation in September provides a small relief for the Riksbank ahead of its rate decision on Oct. 24. Still, weaker price pressures than a year ago, coupled with the worsening outlook for the global economy, will likely make the Swedish central bank refrain from raising rates around year-end.”
Johanna Jeansson - Nordic economist

The battered krona, this year’s worst-performing major currency, surged on the revived hopes of an exit from negative rates, climbing 0.8% against the euro.

Policy makers have argued that with inflation is only experiencing a temporary dip and that they can raise rates even as the economy slows down. But they do risk a rerun of making the same mistake as in the aftermath the financial crisis, when they were famously labeled “sadomonetarists” by Nobel laureate Paul Krugman for raising rates.

“One could argue that the risk of a policy mistake a la 2008 has now risen,” Enlund said.

To contact the reporter on this story: Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Nick Rigillo

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