Riksbank Sows Confusion as Analysts Split on December Move

Economists following the Swedish central bank are once again having a hard time figuring out what its policy makers are planning.

Eight of 14 economists surveyed by Bloomberg predict the Riksbank will keep rates unchanged at 1 percent at its meeting this month, while the rest predict a cut to 0.75 percent. Analysts are the most split on what they think the bank will do since December 2011.

“If the market is pricing a fifty-fifty likelihood that they will or won’t lower rates, that’s pretty much as bad as things can get, well I guess that’s exactly as bad as things can get,” said Par Magnusson, chief economist in Stockholm at Royal Bank of Scotland Plc. “There’s total uncertainty.”

Policy makers at the world’s oldest central bank are in a quandary as their focus on containing household debt has raised questions around their ability to meet their inflation target. Dissenting members on the six-person board have also argued that a failure to cut rates further is keeping unemployment higher than it should be.

The confusion extends into next year and 2015 with analyst forecasts for the rate ranging from 0.5 percent to 1.5 percent by the end of 2014, and from 0.5 percent to 2.25 percent at the end of 2015, the survey showed.

The krona slid 0.4 percent to 8.9469 per euro as of 2:56 p.m. in Stockholm.

Mixed Data

Board members have been criticized for a lack of clarity ahead of policy meetings and the Riksbank last week issued a statement restating its communication policy. As recently as October, four of the six policy makers predicted the bank will keep its key rate unchanged this month followed by increases starting late next year.

Available evidence on the economy since then has been “mixed,” First Deputy Governor Kerstin af Jochnick said on Nov. 29. While inflation and economic growth have lagged behind estimates, forward looking indicators including the purchasing managers’ indexes for services and manufacturing and consumer confidence have climbed more than estimated.

The split expectations illustrate “the uncertainty about both the economy and how long this weak and low inflation will persist,” said Knut Hallberg, an analyst at Swedbank AB in Stockholm, who said it’s a 60/40 call. The bank will hold rates as it prioritizes keeping household debt in check, he said.

Svenska Handelsbanken AB and Nordea Bank AB also foresee an unchanged rate while SEB AB and Danske Bank A/S predict a cut. Banks outside Sweden are also split, with Commerzbank AG seeing no rate cut and HSBC Plc betting on a reduction.

Beyond 2013

Economists are also at loggerheads on what the Riksbank will do beyond this year to address inflation. SEB predicts the Riksbank won’t start raising rates until 2015 and then only to 1.25 percent by the end of that year. Swedbank forecasts the bank will raise to 1.5 percent already by the end of next year and to 2.25 percent by the end of 2015.

“A high degree of uncertainty about the world economic outlook and confusing signals from some of the Riksbank board members explain the different views,” said Roger Josefsson, chief economist at Danske Bank A/S in Stockholm.

Comments by deputy governors Cecilia Skingsley and Per Jansson last week signaling continued concern over household debt sent the krona higher as traders scaled back rate cut bets.

Jansson later told reporters that inflation data published this week will be “very important” and that it would be “hard to accept” pushing back the bank’s forecast for when it will reach its 2 percent target “significantly” beyond 2015, he said.

Inflation Report

Statistics Sweden is due to publish November inflation data on Dec. 12. Headline prices will rise an annual 0.2 percent, according to the median estimate of 12 economists surveyed by Bloomberg. Inflation adjusting for mortgage costs will be 0.8 percent, the survey shows.

Sweden’s consumer price index fell an annual 0.1 percent in October while the gauge that excludes mortgage costs rose 0.6 percent. The latter, which is the Riksbank’s preferred measure, has remained below its target since December 2010.

At his most recent meeting with reporters last month, Governor Stefan Ingves played down the threat of deflation and said inflation will gradually accelerate toward the target as the economy recovers.

The bank has cut its 2014 headline inflation forecast at all but one of nine meetings since April last year. It now predicts inflation, excluding mortgage costs, will be below target through 2015.

“We have super low inflation, we have had no growth in the economy since the first quarter and unemployment is too high,” said Magnusson. “It ought to be a no-brainer to cut at this juncture.”

‘Incredibly Surprising’

The economy is struggling to gain momentum, weighed down by slack export demand from a recession-stricken Europe. Gross domestic product grew 0.1 percent in the three months through September. Yet other indicators suggest Sweden’s property market is overheating.

Household debt has almost doubled since the mid-1990s to more than 170 percent of disposable incomes. Apartment prices, which have more than doubled since 2000, increased 14 percent in the 12 months through October.

“There are people in my office who don’t think they will cut, but to me it would be incredibly surprising if they didn’t” since “there are no indications inflation will accelerate,” Josefsson said. “If you don’t have upward trending inflation, how in the world are they going to argue that it’s more important to focus on household debt?”

Before it's here, it's on the Bloomberg Terminal.