Sweden Inflation Unexpectedly Slows in Blow to Riksbank Forecast

Swedish inflation came in well below forecasts last month, raising questions about central bank guidance as price growth remains stubbornly far from the official 2% target.

The krona fell as much as 0.4% against the euro, its biggest decline in a fortnight.

The Riksbank’s target measure, CPIF, fell to 1.5% in February from 1.7% in January, Statistics Sweden said Monday. The reading was below all forecasts in a Bloomberg survey of economists that had foreseen a median of 1.8%. The Riksbank had expected inflation to reach its 2% target.

The development will add to speculation that the Riksbank will be forced to reconsider a return to negative interest rates, after abandoning the policy at the end of 2019.

“Today’s reading supports our view that underlying inflation pressures are low and that inflation will be far below the Riksbank’s target in the second half of this year,” economists at SEB said in a client note.

Inflation in February was held back by a decline in food prices, which offset higher energy costs. The Riksbank’s main interest rate is zero, and its own forecasts indicate it’s likely to remain there for the foreseeable future.

“The Riksbank will now start debating a rate cut with greater seriousness again,” Robin Winkler, an FX strategist at Deutsche Bank, said in a research note. “Today’s disappointing inflation numbers probably warrant a larger risk premium“ in Swedish short-term interest rates, he added.

Despite the weak outlook for inflation, Sweden’s economy has so far weathered the fallout from the coronavirus better than most, thanks to record government spending and after the absence of a lockdown meant much of society remained open during the pandemic.

What Bloomberg Economics Says...

“The surprise drop in inflation adds to the Riksbank’s woes after an already long stretch of below target prices increases. The past year’s strengthening of the krona and modest pay increases will keep a lid on inflation going forward.”

-- Johanna Jeansson, Bloomberg economist

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.