Sweden Inflation increase increases pressure on the Riksbank to tighten
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Swedish inflation rose more than expected in April, which raised expectations that the country’s central bank will need to accelerate interest rate hikes flagged last month to restore confidence in its political target.
The central bank’s target, the CPIF, accelerated to 6.4% on an annual basis in April, the highest level since 1991, according to data released by Statistics Sweden on Thursday. Economists polled by Bloomberg expected prices to rise by 6.2%.
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The Riksbank, which has thrown away its zero interest rate policy and initiated a series of interest rate increases, had expected price increases of 5.9 per cent. In connection with its decision on 27 April, the bank said it expects to increase borrowing costs two or three more times this year, but higher-than-expected inflation casts doubt on whether this will be enough.
Economists at Svenska Handelsbanken as well as Swedbank changed their forecasts and now expect the Riksbank to raise the key interest rate by 50 basis points, instead of 25, at the next meeting. They said that an alternative scenario outlined by the central bank last month, which included higher inflation and steeper interest rate hikes, is now more likely to materialize.
“Today’s outcome complements the evidence that indicates a much more lasting inflationary pressure in Sweden than anyone had predicted just six months ago,” says Johan Lof, senior economist at Handelsbanken. “The inflation outlook is clearly in line with the Riksbank’s scenario for high inflation, where it predicted a more hawkish line of action.”
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The Riksbank’s radical change in April came after a series of inflation readings showed that prices rose the most in three decades, which made the central bank’s wait-and-see approach obsolete. In particular, recent data have shown that inflation is no longer limited to energy prices, but filters through to a wider range of goods and services.
Governor Stefan Ingves said on Tuesday that there will be a “super focus” on inflation data for April, adding that there are “no technical restrictions” for a potential increase of 50 points, but that “it is not something we see in front of us currently .”
In April, a measure that strips fuel and electricity rose by 4.5% on an annual basis, which was in line with what economists had expected but slightly higher than the Riksbank’s forecast.
The Riksbank’s tightening will probably slow down growth as heavily indebted households are facing increased interest costs. Combined with the rise in prices, this has already led to a drop in consumer confidence to levels last seen at the outset of the Covid-19 pandemic.
In an economic forecast published on Wednesday, economists at Nordea Bank said that the challenges for households are about to increase, while a forecast fall in house prices may also make consumers less willing to spend.
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