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Sweden’s economy might be looking “surprisingly strong”, but don’t hold your breath if you’re waiting for an end to the central bank’s negative interest rates.
Local bank Nordea has cut its forecasts for the Riksbank’s rate path, as the central bank’s governor stressed that he doesn’t expect inflation to stabilise around its target until the end of next year, despite already being at a five-year high.
In its quarterly macroeconomic update released today, Nordea said “spring is on its way” for the global economy, and upgraded its forecasts for global economic growth from 3.3 per cent to 3.5 per cent.
In Sweden specifically, the bank said “indicators paint a bright picture of the near future” after the economy expanded 1 per cent in the final quarter of last year, but it doesn’t expect the strength to translate into sustained price increases.
Jan von Gerich, Nordea chief analyst, said:
The upturn in inflation is fragile and the krona’s performance is a source of concern as a surprisingly sharp appreciation of the krona may dampen inflation. Therefore, the Riksbank will probably stay on hold as there is little need to stimulate the economy further. Signals of a tighter monetary policy stance are still a long way off.
Sweden’s headline inflation rate hit 1.8 per cent in February, within sight of the Riksbank’s 2 per cent target, but Nordea sees the number falling back again as the impact of a stronger krona drags down import prices.
Although Nordea is expecting the central bank to end its quantitative easing programme in June, it has pushed back its forecast for a first rate hike to the second half of 2018, and now expects the repo rate to remain negative into 2019.
The update came as Riksbank governor Stefan Ingves once again defended the success of its monetary policies at a speech in Stockholm.
Mr Ingves said expansionary monetary policy was a “major explanation” behind the strong economic activity Sweden is currently enjoying. However, in a further sign that the bank is not ready to end the stimulus, he stressed that the Riksbank is expecting inflation to stabilise “only at the end of 2018″.