Sweden’s Return to Deflation Raises Bets on December Cut

Sweden unexpectedly returned to deflation last month, sending the krona to its lowest against the euro since June 2012 as speculation increased the central bank will be forced to cut interest rates again.

Consumer prices fell an annual 0.1 percent in October, Statistics Sweden said today. They were seen rising 0.2 percent, according to a Bloomberg survey of 12 economists. Adjusted for mortgage costs, price gains slowed to an annual 0.6 percent from 0.9 percent.

“The Riksbank has for some time, especially after the ECB refi rate cut last week, been under increasing pressure to cut the repo rate,” SEB analysts including said Olle Holmgren said in a note today. “Today’s inflation data was a substantial downside surprise and confirms once again the low inflationary pressure in the Swedish economy.”

The krona plunged as much as 1.3 percent against the euro to 8.9138, the lowest level since June 11, 2012. It slid as much as 1.5 percent versus the dollar to 6.656, the lowest since Sept. 6. It was the biggest loser against both the dollar and the euro of 16 major currencies tracked by Bloomberg.

The Riksbank in October kept its repo rate at 1 percent and signaled tightening won’t start until late next year. Two of the bank’s six board members have been arguing that rates should be cut again to help reach the 2 percent inflation target.

SEB said it now predicts a rate cut to 0.75 percent next month from the Riksbank. The European Central Bank last week cut its main rate to a record low 0.25 percent.

Cleary Lower

Deputy Governor Cecilia Skingsley told reporters today after a speech in Stockholm that she didn’t want to comment specifically on today’s inflation data.

“It was lower than what we had forecast -- that’s clear,” she said. “And that, together with all other data and development of events, we will have to weigh together at our next interest rate meeting.”

Inflation, excluding mortgage costs, has trailed the bank’s price target since December 2010.

The bank said on Oct. 24 that while inflation is low, import prices and wages will rise faster “when economic activity improves.” The Riksbank forecast that inflation adjusted for mortgage costs will be 1.3 percent next year and 1.9 percent in 2015. It predicted the economy will expand 2.6 percent next year after 0.7 percent growth this year.

Wage Growth

Policy makers have cited a build-up in household debt and rising house prices as a reason for not cutting rates further.

“With wage growth weak and the recovery in activity still fairly tentative, a case can be made for the Riksbank to cut the repo rate from its current level,” David Tinsley, an economist at BNP Paribas in London, said today in a note. “It’s not clear however that the Riksbank Executive Board is yet prepared to modify its stance that the level of household debt in Sweden is a constraint on the scope for further easing.”

While BNP continues to see “a sustained period of unchanged rates” the “balance of risks is shifting in favor of the bank making a move,” he said.

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