Sweden inflation retreats, bringing some relief for Riksbank

SWEDEN’S underlying inflation slowed for the first time in more than a year, raising hopes of a turnaround for the Nordic nation’s households and its central bank, which remains under pressure to raise borrowing costs.

A price measure that strips out energy costs and the effect of interest-rate changes rose 8.9 per cent from a year ago in March, according to Statistics Sweden, marking a retreat from a three-decade high. That was lower than the 9.1 per cent projected by economists, even though the level far exceeds the central bank’s estimate of a 7.5 per cent rise.

The reading comes after a string of inflation data that has wrong-footed the world’s oldest central bank since the autumn of 2021. The Riksbank has said it expects to raise the key rate from 3 per cent when the executive board gathers on Apr 25.

Policy makers are facing a delicate balancing act as further rate hikes will add to the burden of households that are already feeling the pain of increased borrowing costs and food prices rising at the fastest rate since the 1950s. The tightening is also weighing on economic output, with Sweden set to experience the worst contraction in the European Union this year, according to OECD forecasts.

The lower-than-expected outcome in March was explained by prices on goods such as books, clothing, and food, which didn’t increase as much as projected, according to Swedbank economists Carl Nilsson and Glenn Nielsen.

“We maintain after today’s data that the Riksbank will hike by 50 basis points, since the gap between core inflation and the Riksbank’s forecast now stands at 1.4 percentage points – far too high for the Riksbank to not err on the hawkish side,” they said in a note.

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While the central bank has lately focused more on underlying price growth, the CPIF inflation rate, which includes energy prices, was also lower than economists’ forecast, at 8 per cent.

Riksbank governor Erik Thedeen has said that data published ahead of the April meeting is “more important than ever” for determining its course of action. Swedish long-term inflation expectations by money market players rose slightly in the latest Prospera survey published on Thursday, also providing input for the decision.

Investors now expect 63 basis points of extra hikes in three months, and a total of 74 basis points by October, according to swaps.

“At least a step down to the still waaaay too high monthly pace that we saw during 2022,” Handelsbanken senior economist Johan Lof said. “But far to early for the Riksbank to declare victory.” BLOOMBERG