Nordic Inflation Below Target Opens Options for Central Banks

Inflation in Sweden and Norway remained well below central bank targets in December, reinforcing bets that benchmark interest rates will be slow to rise in the region grappling to avoid Europe’s debt crisis.

Swedish consumer prices dropped for a second month by an annual 0.1 percent as Europe’s sovereign debt crisis hurt exports and companies cut jobs, according to Statistics Sweden. In Norway, inflation unexpectedly slowed to 1.1 percent from 1.3 percent in the prior month as krone gains weighed on import prices, according to the Oslo-based statistics office.

“From a pan-Nordic perspective, I’d say that inflation overall remains soft and gives both central banks room to maneuver,” Erica Blomgren, chief strategist at SEB AB in Oslo, said in an interview. “For the Riksbank that adds to advocating rate cuts to stimulate the downturn in the economy, while for Norges Bank it suggests that the bank has no need to rush and hike rates.”

Central bankers are struggling to balance policy to shield the largest Nordic economies from a euro-area recession without fueling a further build-up in household debt. Sweden’s Riksbank, which targets 2 percent inflation, in December cut its key rate to 1 percent, and indicated it would keep rates unchanged until late this year, while Norges Bank has kept its benchmark at 1.5 percent since March.

Currencies Drop

Sweden’s krona and Norway’s krone weakened against the euro today, trading at 8.5762 and 7.3085 by 11:58 a.m. local time.

Sweden, the Nordic region’s largest economy, is feeling the strain of weaker export markets as industrial production fell a more than estimated 1.3 percent in November from the previous month, Statistics Sweden said in a separate release today.

The data “underlines that the near-term activity picture in Sweden is very soft,” David Tinsley, an economist at BNP Paribas SA in London, said in a note to clients. “That should keep alive a fairly lively debate at the Riksbank as to whether to make a further cut in the policy rate.”

Policy makers in Norway, western Europe’s largest oil producer, are struggling to curb krone gains, which make imported goods cheaper and damp inflation. The bank has signaled it will raise rates as soon as March to combat household credit growth and surging house prices. The krone emerged as a haven from Europe’s debt crisis last year, strengthening 7.4 percent against the dollar last year and 5.5 percent versus the euro.

If inflation “stays lower while the krone remains slightly stronger than expected, it is reasonable to believe that the central bank will postpone the start of rate hikes,” Kyrre Aamdal, a senior economist at DNB ASA, Norway’s biggest lender, said in a note to clients.

Policy makers in Sweden will meet next month to decide on interest rates, while Norges Bank is scheduled to hold its next meeting on March 14.

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