Sweden 1-2 year inflation expectations continue to rise, reduce likelihood of Riksbank rate cut

According to Prospera’s quarterly survey, the Riksbank's much watched Sweden inflation expectations for the five-year horizon came in at 1.95 percent in December, down from the 2.00 percent in September. Inflation expectations on the 1-year horizon as well as for the 2-year horizon continued to rise somewhat.

The rise in inflation expectations during the past year coincides with the uptick seen in CPI-inflation. Data released by Statistics Sweden on Tuesday showed that Sweden's consumer price inflation accelerated for the second straight month in November to the highest level in more than four-and-a-half years. Swedish consumer price index rose 1.4 percent year-over-year in November. Underlying inflation rate was up 1.6 percent year-over-year, up from 1.4 percent a month ago.

"The bank will see this as a sign that monetary policy works and that the credibility for the inflation target has strengthened. Today’s figures, therefore, decrease the likelihood for our forecast that the Riksbank will cut its policy rate by 10 bps," said Nordea Bank in a report.

Survey showed wage expectations from representatives of both the employers’ and employees’ organisations edged down and are now below the historical averages. The modest wage expectations suggest that the already low wage growth will not rise, despite the strong labour market. Such an environment makes it challenging for the Riksbank to raise inflation and keep up inflation expectations. 

Swedish Central Bank Deputy Governor Martin Floden at a conference last week said the current upward trend in Sweden's inflation expectations was "reassuring" and that a low-interest rate environment, while associated with some risks, was unavoidable in order to drive price increases ahead.

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