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Swedish industry shows positive signs, rate decision in balance

[STOCKHOLM] Sweden's economy put in a mixed performance in December, data showed on Thursday, leaving the jury out on whether the country's central bank will adopt negative interest rates next week to combat falling prices.

In what was the last major set of indicators before the Riksbank's policy decision, industrial production rose 1.7 per cent from November and was down 1.6 per cent year-on-year. Both figures, published by the statistics office, were better than expected.

Industry orders rose 5.1 per cent but fell 11.4 per cent from a year earlier. Production in the services sector shrank 0.2 per cent on the month but was up 3.7 per cent from a year earlier.

Analysts are divided on whether the central bank will cut rates from the current zero per cent on Feb 12 and Thursday's figures seem unlikely to sway opinions on its six-member rate-setting board.

"The figures confirm the split nature of the Swedish economy," said Andreas Wallstrom, economist at Nordea.

"Manufacturing industry remains quite weak but there is an increase in the pace of the services sector."

The Riksbank is struggling with a policy conundrum.

Interest rates have been at zero since October and some economists have said Sweden risks falling into a deflationary spiral.

Headline consumer prices fell or were flat every month but one last year on an annual basis. December's inflation figures were stronger than expected, though they still showed headline prices falling on an annual basis.

But growth is picking up and the economy is expected to expand 2.6 per cent this year and accelerate again in 2016.

In addition, the European Central Bank's announcement of quantitative easing has pushed Swedish bond yields to record lows without leading the crown to strengthen.

Although analysts believe the tools at the Riksbank's disposal will have a limited effect on inflation, many nevertheless expect the Riksbank to follow the ECB's lead in adopting unconventional measures - with negative rates as a first step.

At its last meeting, the central bank said it could take new steps as early as its February meeting, including adopting negative rates, offering cheap loans to banks and buying bonds.

"We think that the Riksbank will cut by 10-15 points, that's also what the market has priced in," said Olle Holmgren, economist at SEB.

Nordea, meanwhile, expects no change in rates nor any unconventional measures this year.