Riksbank QE Bets Abate as Prices Fall Less Than Predicted

Speculation the Riksbank will need to turn to unconventional measures to push the largest Nordic economy out of deflationary spiral eased after a report showed Sweden’s consumer prices declined less-than-anticipated in December.

Consumer prices fell an annual 0.3 percent in December, according to Statistics Sweden, less than the 0.5 percent predicted in a Bloomberg survey of analysts. Assuming constant interest rates, inflation was 0.5 percent, beating the 0.2 percent estimate. The krona surged 1.3 percent to 9.4303 as of 11:47 a.m. in Stockholm. Sweden’s two-year yields climbed two basis points to 0.05 percent.

This is a “relief for the Riksbank,” Torbjoern Isaksson, chief analyst at Nordea Bank AB, said in a note. It reduces “the probability that the Riksbank will implement unconventional measures at the February monetary policy meeting,” he said.

The central bank last month vowed to keep its main rate at zero further into 2016 and said it was prepared to postpone increases and enact measures such as asset purchases, direct lending and negative rates and currency interventions. The bank, led by Governor Stefan Ingves, has been forced to reverse rate increases made in 2010 and 2011 amid criticism from economists including Nobel laureate Paul Krugman for failing to meet its 2 percent inflation target.

Danske Bank A/S predicts the central bank won’t have to resort to unconventional measures, or quantitative easing, as inflation will slowly start to pick up, according to Michael Bostrom, chief analyst at the bank in Stockholm.

‘Long Time’

Still, the bank will keep its repo rate at zero “for a long, long time,” he said.

Analysts at banks including HSBC Holdings Plc and Royal Bank of Scotland Group Plc said more measures are still probable.

“Inflation has been very low for some time as a result of competitive pressures and the Riksbank is running out of options,” said James Pomeroy, an economist at HSBC, in a note. “With currency intervention looking unlikely, and QE likely to be ineffective, we believe that the Riksbank will have to cut the repo rate into negative territory by April.”

Par Magnusson, head of Scandinavian rate strategy at RBS, expects the Riksbank to introduce negative rates as a first step, and possibly also QE.

This “depends very much on the effects of the Greek election and QE from the ECB,” he said. “They may do something in February, and if not, it’s very likely they’ll do something in April.”

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