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Riksbank May End Asset Buys In Jun, Hike Rate Later This Year: Capital Economics

Sweden's inflation is likely to shrug off the decline in March and rise in April, prompting the central bank to signal an end to its asset purchases soon when it meets later this month, Capital Economics economist Stephen Brown said this week.

"As there is now an increasing risk that inflation will overshoot the Riksbank's target, later this month we expect the Bank to signal that its asset purchases will end in June and we think that it will raise interest rates later this year," Brown said.

In March, Swedish consumer price inflation eased to 1.3 percent from 1.8 percent in February, official data showed on Tuesday. That was much bigger than both the consensus estimate and the Riksbank's forecast of a shallower drop to 1.5 percent, the economist pointed out.

The CPIF inflation that excludes the direct effects of interest rate changes also decreased to 1.5 percent from 2.0 percent.

"The sharp drop in inflation was largely temporary," Brown said, as Easter falls in April rather than March this year.

This means that inflation looked unusually weak in March due to base effects for items such as package holidays and flights, the economist noted.

That said, transport inflation will not fully rebound in April, given that part of March's fall was probably also due to slower fuel inflation after the strong rates seen earlier in the year, Brown added.

In future, the outlook for inflation will depend partly on the remaining wage negotiations and even without a sharp pick-up in wage growth, tighter economic conditions will still drive up inflation, the economist stressed.

"As there is a growing risk that inflation will overshoot the Riksbank's 2 percent target, the Bank's exceptionally loose monetary policy is no longer justified," Brown said.

"In the next monetary policy announcement on April 27, we expect it to signal that it will end asset purchases in June. And we think that the Riksbank will begin to raise its repo rate at the end of this year."

On February 14, the Riksbank held the repo rate unchanged at -0.50 percent and said there was still a greater probability that the rate will be cut than that it will be raised in the near term.

The bank said that though economic activity was strengthening there was considerable political uncertainty abroad and the risks of setbacks have increased. A continued strong level of economic activity and a krona that does not appreciate too rapidly are required to help stabilize inflation around 2 percent, the bank added.

by RTT Staff Writer

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