Sweden's flag blowing in the wind against a clear blue sky.

Sweden experienced its 16th month of deflation in the past two years in September, raising the prospect of another interest rate cut later this month.

Consumer prices fell 0.4 per cent in September, continuing a deflationary trend since the autumn of 2012 that has led Princeton economist Paul Krugman to accuse Sweden’s central bank of “sadomonetarism” and of the country “turning Japanese”.

Economists said on their preferred measure of core inflation – used too by the Riksbank, the world’s oldest central bank – readings were still positive but still far lower than expected. In September core inflation was 0.3 per cent, below the Riksbank’s forecast of 0.7 per cent.

Worryingly for the Riksbank, long-term inflation expectations among consumers are slightly below the central bank’s target of 2 per cent.

“It is problematic for the central bank and they are worried about the inflation expectations. I think they are a little bit scared that they are below the target,” said Annika Winsth, chief economist at Nordea in Stockholm.

Analysts at Nordea and other big Swedish banks immediately changed their forecasts to an imminent rate cut when the Riksbank meets at the end of this month. Rates are currently at 0.25 per cent and Nordea expects the Riksbank to cut it by 20 basis points.

Sweden’s central bank has been lambasted by critics for trying to use interest rates to combat signs of a housing bubble. It lifted rates in 2010 and 2011 as it publicly worried about what it saw as high household debt levels.

But it has been forced to retreat with a series of rate cuts in the past year and an admission that its focus is now on inflation, with other bodies – such as the Swedish Financial Supervisory Authority – dealing with the debt issue.

Some responses by the regulators, however, are drawing criticism from economists due to their timing. Following a report by the financial watchdog last year that the average Swedish holder of a certain type of mortgage took 140 years to pay back the debt, banks are proposing to force mortgage holders to pay down parts of their loans. But some economists worry that tightening requirements at a time of deflation or falling core inflation could exacerbate the slowdown.

The Swedish debate also comes against the backdrop of intensifying fears that the eurozone could be on the verge of Japanese-style deflation, with inflation in September falling to 0.3 per cent.

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