Swedish inflation slows in August, Riksbank still expected to hike rates

Christmas shoppers maintain social distancing as they ride on escalators in Emporia shopping center in Malmo, Sweden, Dec 20, 2020. TT News Agency/Johan Nilsson via REUTERS/File photo

STOCKHOLM  – The pace of headline Swedish inflation slowed more than expected in August, official data showed on Thursday, but analysts believe it will not be enough to prevent the central bank raising its policy interest rate next week.

The consumer price index measured with a fixed interest rate (CPIF) fell 0.1 percent in August from the previous month but was up 4.7 percent from the same month last year, Statistics Sweden (SCB) said.

The central bank targets 2 percent CPIF inflation.

Excluding volatile energy costs, inflation was 7.2 percent, slowing from 8 percent the previous month and against a forecast of 6.9 percent from the Riksbank.

“With the labor market still very tight and policymakers concerned about underlying price pressures and the weakness of the krona (crown), the Riksbank will still implement a further 25 basis point rate hike next week,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a client note.

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The statistics office said lower electricity, food and package holiday prices contributed to the slowdown in headline inflation.

The Riksbank had forecast headline inflation at 4.8 percent on an annual basis. Analysts expected it to be 4.9 percent.

Headline inflation was 6.4 percent in July.

Raising the policy rate to 3.75 percent in June, the Riksbank said it expected to tighten policy at least one more time this year. It announces its next policy decision on Sept. 21 with a hike to 4 percent widely expected.

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However, the central bank is worried that the crown, at its weakest-ever level against the euro, is adding to inflationary pressure, indicating a hike in September may not be the end of the bank’s monetary tightening cycle.

Moreover, an interest rate hike by the European Central Bank later on Thursday or in the months ahead may force the Riksbank to tighten again, despite the slowing economy.

“The crown needs to be stronger in order to help get inflation under control,” said Lars Kristian Feste, head of fixed income at Ohman Funds. “The rate difference internationally is still the most important factor for the crown if it is to stabilize and get stronger.”