Swedish Riksbank Rate Cut Pressure Eases on Labor Market

Sweden escaped deflation and the labor market showed signs of weathering the European debt crisis in January, easing pressure on the central bank to cut interest rates.

Consumer prices were unchanged in the year after falling 0.1 percent the previous two months, while seasonally adjusted unemployment remained unchanged at 8 percent, Statistics Sweden said today. The annual inflation rate matched the median estimate of 11 economists in a Bloomberg survey.

Sweden’s central bank this month kept its main lending rate at 1 percent, citing signs of an improving economy. The Riksbank predicted an end to cuts following four rate reductions in a year aimed at buoying the export-dependent economy amid a decline in European demand.

Today’s inflation and unemployment data are “allaying concerns that higher unemployment or low inflation would push the Riksbank in April,” said Josh O’Byrne, a currency strategist at Citigroup Inc. in a note to clients. “With the potential stumbling block out of the way, the data should represent a net positive for” the krona.

Krona Gains

The krona strengthened as much as 0.4 percent versus the euro to 8.4368 and pared the gain to 0.1 percent at 11:07 a.m. in Stockholm. Against the dollar, the krona gained 0.2 percent to 6.3317.

Most euro-area countries are cutting spending to reduce debt, hurting Swedish sales, which account for about half of its output. About 70 percent of the exported goods are sold in Europe.

“There doesn’t seem to be any big weakness on the labor market at the moment,” said Richard Falkenhall, a currency strategist at SEB AB in Stockholm. “There is still a probability of further rate cuts” even as today’s data “suggest that they will keep the rate unchanged” at the next meeting in April.

Swedish gross domestic product will grow 1.2 percent this year and 2.7 percent in 2014, compared with 0.9 percent in 2012, the central bank forecasts. Unemployment will rise to an average 8.1 percent this year from 7.7 percent in 2012, while underlying inflation will average 1 percent this year and accelerate gradually to “close to” 2 percent by the middle of next year.

Gradual Growth

“Swedish GDP growth will gradually increase over the year, although there is a risk of setbacks” even as the “economy is still being affected by the economic crisis in the euro area,” the Riksbank said on Feb. 13. “As GDP growth picks up, employment will rise, however, and unemployment will fall.”

Adjusted for mortgage costs, Swedish inflation was unchanged at an annual 1 percent in January, while prices fell 0.7 percent on the month compared with an 0.3 percent increase in the prior period, Statistics Sweden said today. Headline inflation fell 0.8 percent on the month.

The non-seasonally adjusted unemployment rate rose to 8.4 percent in January from 7.6 percent last month. Starting in January, Statistics Sweden has changed the way it calculates the jobless rate to improve accuracy and assure compatibility over time, it said on Feb. 14.

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