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Swedish High Street Rebound Ends Bets for Riksbank Cuts

Swedish High Street Rebound Ends Bets Riksbank Will Cut Rates
A customer carries a branded shopping bag towards a H&M store in Arlanda, Sweden. The revival in consumer spending, which comes amid rising unemployment, may make it easier for the Riksbank to stick to its forecast from last month for unchanged rates this year. Photographer: Linus Hook/Bloomberg

Sweden’s consumers are confounding economic forecasters by spending at the fastest pace in 10 months, prompting investors to reverse bets that the central bank will cut interest rates.

Retail sales rose an annual 3.4 percent in February, more than twice the 1.6 percent median forecast in a Bloomberg survey and the fastest pace since April, the statistics office said yesterday. A survey released March 28 showed consumer confidence at a seven-month high while manufacturing confidence rose to the highest since July, recovering from a two-year low in January.

Investors have pared bets on more central bank rate cuts, after policy makers lowered borrowing costs to 1.5 percent last month to stave off a recession. December futures on the Riksbank’s key rate rose to 1.26 percent this week from 1.17 percent, suggesting traders are starting to hedge bets the bank will cut once more.

“Economic indicators show that we have bottomed,” Riksbank Deputy Governor Karolina Ekholm told Bloomberg after a speech today in Stockholm. “We saw a slight upturn earlier and then everyone sat around waiting if things were to continue up or if things would turn down. Well now things are continuing pretty significantly upwards.”

Anticipated a Bit

The revival in consumer spending, which comes amid rising unemployment, may make it easier for the Riksbank to stick to its forecast from last month for unchanged rates this year.

Improvements were already anticipated a “little bit” in the Riksbank’s forecasts, Ekholm said, who last month called for a rate cut to 1.25 percent and that it should bottom at 1 percent and stay there through the third quarter next year.

The krona is up 0.65 percent over the past three days against the euro as traders pared rate cut estimates. It traded up 0.2 percent to 8.8462 per euro as of 3:54 p.m. in Stockholm.

“We’re probably very close to the bottom of the economic cycle,” said Robert Bergqvist, chief economist at SEB AB in Stockholm and a former central bank analyst. “We’re at a stage when we will start to see gradual improvements in the economy and therefore I think it makes sense to stay put at 1.5 percent.”

European Money

Sweden’s economic expansion stalled last year as Europe’s debt crisis sapped demand for exports from companies such as truckmaker Scania AB and appliance maker Electrolux AB. The economy relies on exports for about half its output. Nordea Bank AB, the largest Nordic lender, forecast this week that the Swedish economy would shrink 0.3 percent this year and that the Riksbank would need to cut rates to as low as 0.75 percent.

Sentiment is improving after the European Central Bank pumped in more than 1 trillion euros ($1.3 trillion) in two longer-term refinancing operations since December to ease the region’s debt crisis. Stocks across Europe have surged, including an 8 percent gain for the benchmark Swedish OMX index.

European finance chiefs meet today in Copenhagen to discuss boosting rescue funds for the region’s debt-stricken nations.

Swedish Prime Minister Fredrik Reinfeldt said tax cuts since 2006 have helped sustain the Nordic country’s recovery.

“We have seen a real wage increase from 1995 and forward that has strengthened real wages by 50 percent,” he told Bloomberg yesterday in Stockholm. “The government since 2006 has put in place consistent policies to make it more worthwhile to work. We’re talking about very strong improvements for low-and normal wage earners which fundamentally strengthen the purchasing power for broad groups in Swedish society.”

Positive Exports

Sweden’s economic prospects have also picked up as the outlook for its biggest trade partners brightens.

“We have also received more positive export figures during the beginning of the year,” Ekholm said today.

Unemployment in Germany fell more than forecast in March, adding to evidence that growth in Europe’s biggest economy is gaining traction. The adjusted jobless rate slipped to 6.7 percent, a two-decade low, a report released yesterday showed. Exports to Germany account for 10 percent of Sweden’s total sales abroad, its largest market.

Sweden’s National Institute of Economic Research forecast on March 28 that the Riksbank will probably keep its main rate unchanged through 2013, after earlier predicting it would need to reduce it to 0.75 percent. The group also forecast the economy will grow 0.4 percent this year and 2.5 percent in 2013.

Several Signs

The institute estimated unemployment will average 7.7 percent this year and next, matching the Riksbank’s forecast.

“We’re seeing several signs of an improving economy, a lot of economic surveys have been positive” and stock market prices have risen, said Jesper Hansson, head of forecasting at the institute, at a press conference yesterday.

SEB this week raised its growth forecast for Sweden by 0.2 percentage point for this year and next to 0.7 percent and 1.9 percent, respectively. According to Bergqvist, households “are well positioned,” as wages, adjusted for inflation, will rise as much as 2.5 percent this year and as the government may enact measures to stabilize the labor market.

Danske Bank A/S, the largest Danish lender, scrapped its forecast for another Riksbank rate cut next month and predicts the key rate will drop to 1 percent in 2012 versus an earlier forecast of 0.5 percent. The confidence and retail sales data were “fantastic” and the bank will also revise its forecast for a 1 percent contraction of the Swedish economy this year, said Chief Economist Roger Josefsson.

“Many of the risks we included in our forecasts in December have not materialized but the ECB has actually succeeded in turning this around,” he said.

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