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Riksbank to Cut Rates as Deflation Seen in 2014, NIER Says

Sweden’s central bank will cut interest rates again this year as deflation takes hold in the largest Nordic economy, the National Institute of Economic Research said.

“The weak outlook for inflation means that the Riksbank will cut its repo rate to 0.50 percent in July,” the Stockholm-based institute said in a report published today. “Further low central bank policy rates abroad will contribute to the repo rate remaining low for a long period. A first rate hike in Sweden is not expected until late 2015.”

In its previous forecast in March, the NIER said that the Riksbank should lower rates further, even as it forecast that the repo rate would remain at 0.75 percent this year, and rise to 1.25 percent in 2015 and 1.75 percent in 2016.

The institute predicted consumer prices will decline 0.1 percent this year and that price increases, exluding mortgage costs, will remain below the Riksbank’s 2 percent target until 2018. The Riksbank has been reluctant to cut rates again to avoid a further build-up in consumer debt levels to protect the economy.

The NIER today cut its economic growth forecast for this year to 2.2 percent, and said it sees an expansion of 3 percent next year and 3.3 percent in 2016. Unemployment will be 8.1 percent this year and decline to 7.7 percent in 2015.

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