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Riksbank Seen Prolonging Zero Rate to Escape Deflation Trap

Sweden’s central bank is seen pushing back planned interest rate increase beyond mid-2016 as it seeks to wrest the largest Nordic economy out of deflation.

Policy makers, who meet today in Stockholm, will tomorrow announce they kept their repo rate at zero for a second meeting, according to all 20 economist surveyed by Bloomberg. They may delay estimated increases to the end of 2016, from mid-2016, analysts at Swedbank AB (SWEDA), Danske Bank A/S and Royal Bank of Scotland Plc said.

Policy makers entered uncharted territory in October by cutting rates to zero to prevent deflation taking hold. The move has so far failed to deliver the necessary jolt as a survey showed inflation expectations continuing to slide and annual consumer prices dropped for a fourth month in November.

The Riksbank will “send out a signal that we’re taking this very seriously,” said Knut Hallberg, an analyst at Swedbank in Stockholm. “To wait until it meets in February to do something could simply be too long.”

Since lowering rates to zero in October, policy makers, including Governor Stefan Ingves, have said that should it be needed, the next step would be to push back planned rate increases. The bank has said it has the “same possibilities” as other banks such as the European Central Bank, which have signaled so-called quantitative easing.

The plunge in oil prices is now exacerbating the struggle to meet the price mandate. Household 12-month inflation expectations dropped to zero in November from 0.4 percent the prior month, according to a November survey from the National Institute of Economic Research.

Not Surrender

Michael Bostroem, chief analyst at Danske Bank in Stockholm, said the Riksbank may delay plans for its first rate increase by as many as two quarters.

“It’s important for a central bank not to surrender,” he said.

Still, some economists said policy makers may see some relief from the weakening krona. The currency has slid about 6 percent against the euro this year.

Svenska Handelsbanken AB (SHBA) predicts the central bank will actually raise rates already in 2015 as the weaker currency lifts inflation.

“The euro will weaken next year and the krona will follow the euro, whereas the dollar will strengthen,” said Chief Economist Jan Haeggstroem. “This means that import prices will increase and this means inflation will increase faster than the Riksbank currently is counting on.”

Norway Cut

A rate cut by the Norwegian central bank last week and further measures from the European Central Bank to stimulate the economy next year are also putting pressure on the Riksbank, according to Hallberg.

At the same time, Sweden is undergoing its worst political crisis since the 1950s. The government this month said it plans to hold the first extraordinary election since 1958 after failing to push its budget through parliament. Consumers are also facing tougher mortgage amortization rules after Sweden said it will take steps as early as next year to stem record-high private debt driven by rising home prices.

According to Par Magnusson, chief economist at Royal Bank of Scotland in Stockholm, the bank may postpone the timing of its first rate increase by as many as six months tomorrow. It will then probably cut to below zero at its next rate meeting in February and later intervene to weaken the krona, he said.

“It’s hard to see what will boost demand and there are a lot of things that could push down prices on the supply side of things,” Magnusson said. “The Riksbank will have to do more, absolutely, since the risks of having inflation this low for long are too big.”

To contact the reporter on this story: Johan Carlstrom in Stockholm at [email protected]

To contact the editors responsible for this story: Jonas Bergman at [email protected] Kati Pohjanpalo

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