Riksbank to pin its hopes on Krona

On the domestic front, it has become increasingly clear that the main objective during the upcoming pay talks will be to safeguard Swedish competitiveness. Accordingly, the outcome of the pay talks for the coming years is expected to be lower than the level agreed during the previous round of talks, which resulted in pay increases of just over 2% per year. 

Reflecting cost pressures in Sweden, the year-on-year figure for unit labour costs in the business sector has averaged a mere 0.8% over the past 10 quarters. This indicated that there is not much to pass on to consumers in terms of higher costs.

"Hence, the Riksbank will have to pin its hopes on the krona. However, there are already signs that the effects of previous krona weakness are fading. For example, the year-on-year rate for import prices of consumer goods has already peaked", says Nordea Bank.

Consequently, the SEK will have to weaken markedly from current levels, probably to around SEK 10 versus both the euro and the dollar, for inflation to stabilise around the 2% mark next year. 

"Moreover, the SEK would probably have to weaken even further after that to prevent import prices from shifting from being a driver of inflation to a driver of deflation beyond the forecast horizon", added Nordea Bank.