Swedish January inflation up as expected, rate cut set for mid-year By Reuters

By Simon Johnson

STOCKHOLM (Reuters) – Headline Swedish inflation picked up pace as expected in January, data showed on Monday, and if the increase proves temporary it is unlikely to derail the central bank’s plans to begin cutting interest rates in mid-year.

Consumer prices in Sweden, measured with a fixed interest rate, fell 0.3% in January from the previous month and were up 3.3% from the same month last year, the statistics office (SCB) said.

Stripping out volatile energy prices, inflation was 4.4%.

The numbers were broadly in line with expectations of the Riksbank and analysts.

“We still see inflation falling in the coming months and becoming too low later this year,” Nordea economist Torbjorn Isaksson said. “We stick to our forecast that the Riksbank will cut rates in May.”

Headline inflation had been expected to pick up due to base effects, mostly energy prices.

The central bank targets 2% CPIF inflation.

The pace of inflation has dropped sharply since climbing to over 10% at the end of 2022 and after two years of rapid policy tightening, the Riksbank said it could start to cut rates from the current 4.00% soon – possibly as early as next month, although May or June are seen as more likely.

However, policy makers are likely to proceed cautiously.

The Riksbank remains concerned the downward trend in inflation could reverse with geopolitical tensions, a weaker crown currency and corporate pricing plans all on its radar.

The Swedish crown was slightly stronger against the euro after the data.

Markets have been gradually pushing back expectations for the first cut and how quickly the Riksbank will move to ease policy.

A full cut is not priced in by June and markets expect the policy rate to end the year around 3.35%.

In November – the last time the Riksbank made a forecast for inflation – it saw the headline figure at 3.15% in January.

Excluding volatile energy prices – the measure the Riksbank is looking most closely at – inflation was expected to be 4.5%.

Analysts saw headline inflation at 3.1% and, excluding energy, at 4.4%.

In December, the figures were 2.3% and 5.3% respectively.