Sweden’s underlying inflation continued its ascent in January, adding pressure on the country’s central bank to raise borrowing costs despite the gloomiest economic outlook of all European Union nations.
(Bloomberg) — Sweden’s underlying inflation continued its ascent in January, adding pressure on the country’s central bank to raise borrowing costs despite the gloomiest economic outlook of all European Union nations.
A measure of prices that strips out energy costs and the effect of interest-rate changes rose 8.7% from a year ago, which was higher than the 8.2% projected by economists. The data published by the statistics office on Monday suggest a more difficult balancing act for the Riksbank’s new governor, Erik Thedeen, as he tries to calm stubbornly high inflation — worsened by a weakening krona — at a time price growth is slowing in the US and the euro area.
Rapidly rising interest rates are already weighing on growth, and forecasts from the European Commission indicate that Sweden could be the only economy in the European Union to experience a full-year contraction in 2023.
While the CPIF measure of inflation that the Riksbank targets declined more than estimated to 9.3% in January, it was mainly driven by lower electricity prices. The development resembles that of the euro zone, where headline inflation has eased faster than expected along with energy costs, while gauges that strip out volatile components are still clinging to record highs.
What Bloomberg Economics Says
“The January decline in Sweden’s headline inflation rate will set the tone for the rest of the year, but the uptick in core inflation adds to the Riksbank’s worries. Still, we maintain our call for the central bank to hike rates by 25 basis points when it next meets (in April), but see risks to the upside. Given the January data, core inflation may remain higher for longer than Riksbank currently forecasts.”
— Selva Bahar Baziki, economist
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Economists noted that the January data makes it more likely that the Riksbank will go for a half-percentage-point interest-rate hike when they next meet, in April. Thedeen has said that while the bank could increase borrowing costs by either 25 or 50 basis points then, data published ahead of the next meeting is “more important than ever” for determining its course of action.
“The Riksbank has indicated that they have a low tolerance for overshooting inflation in the near-term,” Swedbank AB analysts Knut Hallberg, Carl Nilsson and Glenn Nielsen said. “Between now and the April meeting, two additional CPI prints will be published, and we see it likely that core inflation will remain above the Riksbank’s forecast until then.”
Swedbank now expects a half-point increase in April, followed by an additional quarter point in June, and said there is a possibility that the Riksbank could call an extra meeting in March, especially if the Swedish krona weakens.
“The Riksbank board will look past the headline CPIF print and focus on the much too high underlying inflation pressure,” said Johan Lof, senior economist at Svenska Handelsbanken AB. “In isolation, today’s inflation print challenges our view that the April hike will be the final one.”
–With assistance from Harumi Ichikura and Joel Rinneby.
(Adds chart, economist comments from fifth paragraph.)
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