Riksbank Seen Cutting Rates as Swedish Inflation Disappoints

Scandinavia’s biggest bank expects Sweden to cut rates next month after December inflation came in below its forecast.

“The Riksbank was very close to acting in December and this figure means we think they will act” by cutting the repo rate to minus 0.45 percent from minus 0.35 percent, said Torbjoern Isaksson, chief analyst at Nordea Bank AB in Stockholm.

Consumer prices rose an annual 0.1 percent in the final month of 2015, according to Statistics Sweden. Adjusted for mortgage costs, prices rose an annual 0.9 percent. The Riksbank expected an annual inflation rate of 0.26 percent and an underlying rate of 1.09 percent. Analysts in a Bloomberg survey had predicted headline inflation of 0.1 percent and underlying inflation of 1 percent.

Minutes from the bank’s latest policy meeting showed that board members were “very disappointed and very worried” about worse-than-expected inflation in November, “and now there’s yet another figure that’s worse than expected,” Isaksson said.

According to  Swedbank AB analyst Ake Gustafsson, the December figures "increase the pressure on the Riksbank to act and we expect a 15 basis point repo rate cut to minus 0.5 percent in February.” 

“Should the Swedish krona strengthen rapidly, we expect the Riksbank to act on short notice with currency intervention,” Gustafsson said in a note. Sweden’s largest lender in terms of customers had previously forecast no further rate cuts.

Riksbank Governor Stefan Ingves has warned he’s ready to intervene in the currency market after the krona strengthened in December following a decision to leave the repo rate unchanged. A strong exchange rate drives down the price of imports, making it harder for the bank to achieve its 2 percent inflation target. Inflation has trailed the target for four years.

The krona fell 0.2 percent to 9.2917 against the euro as of 12:00 pm a.m. in Stockholm.

There’s now a greater likelihood the Riksbank will take some kind of action, either in the form of currency interventions or a rate cut, according to SEB chief FX strategist Carl Hammer. The main scenario at SEB still calls for no cut.

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