NIER sees Riksbank rate cut in December

The National Institute of Economic Research (NIER) made only minor changes in its August forecast. The Swedish economy will grow healthily in the coming years, driven by exports and higher household consumption.

"The Swedish economy will continue to recover, with GDP growing by around 3% both this year and next. The biggest contribution to GDP will come from exports, which are set to climb at 4 to 5% in the coming years, buoyed by an investment-led economic recovery in the OECD countries and a weak krona", says Nordea Bank.

While employment is set to grow at a stable rate, the labour force will expand considerably due to high immigration. This is among the reasons why unemployment will fall only slowly and still be around 7.5% in 2016.

As the economy strengthens, fiscal policy needs to be tightened to bring public finances into balance. Given the government´s principle of fully funded reforms, public finances will remain in deficit until 2018. Fiscal space will therefore be non-existent, even with a switch to a balanced-budget target for public finances.

The NIER does not expect inflation to reach 2% until 2017. Core inflation, as measured by the CPIF, will rise from 0.9% in 2015 and to 1.6% in 2016. The Riksbank's inflation target of 2% measured by CPIF will not be achieved until 2018.

The krona´s depreciation over the past year is one reason why inflation has bottomed out and is now on the way up. The NIER nevertheless expects inflation to rise more slowly than in the Riksbank´s forecast. 

"The Riksbank is therefore expected to reduce the repo rate further to -0.45% in December in a bid to get inflation and inflation expectations to come up more quickly. The repo rate is then assumed to remain at this level until the end of 2016, when a series of rate increases will commence", added Nordea Bank.