End to negative rates seen soon in Sweden after inflation data

Reuters | Nov 13, 2019 at 1:04 PM

STOCKHOLM, Nov 13 (Reuters) - Swedish consumer prices rose in line with market forecasts in October, increasing the chances the Riksbank will end five years of negative interest rates by lifting its key repo rate from -0.25 percent in December.

Sweden's central bank has said it wants to move out of negative rate territory and indicated after its policymakers last met in October that they would tighten policy at their December meeting after a year of no change.

Consumer prices measured with a fixed interest rate were unchanged last month from September and up 1.5% from October 2018, the statistics office said on Wednesday.

That was slightly less than the 1.58% annual CPIF inflation the Riksbank had forecast but in line with the consensus in a Reuters poll of analysts.

"CPIF inflation rose at least roughly in line with our forecasts, though on the margin a little less," Deputy Riksbank Governor Martin Floden said after a speech in Orebro.

"I think that in general, since our monetary policy decision until today there haven't been any big surprises and there is quite a long time before our December meeting."

Markets have already priced in a 25 basis point repo rate hike in December. But analysts have been sceptical about the timing of such a move as central banks around the world are generally moving in the opposite direction and the Swedish economy appears to be slowing.

"This deviation (from the Riksbank's forecast) is not big enough for the Riksbank to back down from its planned rate hike in December," said Olle Holmgren, an economist at SEB. "It will probably take a lot for the Riksbank to change its mind."

CPIF exceeded the Riksbank's 2% target in 10 of 12 months in 2018 but has been below target for the past five months. The Riksbank expects it will remain so in 2020.

Torbjorn Isaksson, an economist at Nordea, said monetary policy had been too expansionary for a long time and that it would be good to raise borrowing costs, but that the Riksbank's timing was ill-chosen.

"Normally, you would cut rates at this time of an economic cycle," he said. "You shouldn't put your foot on the accelerator in descents and you shouldn't brake uphill. And we have a slowdown in the Swedish economy."

OPPOSITE DIRECTION

The Riksbank is forecasting economic growth of 1.3% this year, down from 2.3% in 2018, which it has stressed represents a normal slowdown, not a recession. But other central banks have taken a more dovish stance in the face of a weaker global economic outlook.

Last week, Australia's central bank said it was prepared to ease monetary policy again after cuts in June, July and October.

Two of seven rate-setters unexpectedly backed a cut at the Bank of England's policy meeting last week and others including BOE Governor Mark Carney said they would consider a cut if global and Brexit headwinds do not ease.

The U.S. Federal Reserve cut rates at the end of last month and the European Central Bank eased policy in September, while the Bank of Japan has signalled it could cut rates ahead.

But the majority of Swedish rate-setters argue that inflation remains close to target and that with no recession in sight, a hike in December to zero percent remains a reasonable option. They then see the repo rate remaining unchanged for a long period.

Many analysts believe that at least in part, the Riksbank is motivated by a desire to draw a line under five years of negative rates and give itself some room for manoeuvre should the downturn prove worse than expected.