STOCKHOLM (Reuters) - Sweden’s economy is slowing and the central bank will be forced to keep the benchmark interest rate at the current level of -0.25% for the next couple of years, the NIER think-tank said in a forecast on Wednesday.
Sweden has enjoyed years of strong growth, but the effects of a trade spat between the United States and China and worries over Brexit are finally having an impact and recent data points to a relatively rapid slowdown.
“The Swedish economy has clearly entered a cooling down phase,” Sweden’s National Institute of Economic Research said. “Inflation will remain clearly below 2% and the Riksbank is therefore not expected to hike rates this year or next.”
The NIER forecast growth would slow to 1.2% this year from 2.3% in 2018 and ease further in 2020. It saw inflation averaging 1.7% this year and 1.5% in 2020.
The forecasts are much gloomier than the central bank’s.
In early September, the Riksbank repeated its forecast of a rate hike late this year or early next and rate-setters have mainly stuck to that view since.
But most analysts believe the central bank will be forced to change its mind.
The economy barely grew in the first half of the year, inflation has slipped, unemployment is up - hitting consumer sentiment - and recent PMI figures show both the manufacturing and services sectors contracting.
Production figures for August were decent, giving the Riksbank some hope, but a survey on Wednesday showed inflation expectations diverging further from the 2% target.
“The bank can ignore temporary swings in inflation as long as expectations are anchored at the target, and the downward trend is thus a concern for the Riksbank, supporting our view of a rate cut around the turn of the year,” Nordea economist Torbjorn Isaksson said.
Inflation figures for September are due on Thursday with analysts in a Reuters poll expecting a further decline to 1.2% from 1.3% the previous month. The Riksbank expects underlying inflation of 1.3%.
Disappointing numbers could be enough to scupper the Riksbank’s rate-hike plans. Markets are already pricing in a rate cut, but the central bank may not yet be ready to move that far, even if it does push back its rate-hike forecast when it announces its next policy decision on Oct. 24.
GRAPHIC: Sweden economy: here
GRAPHIC: Riksbank rate, inflation and the Krona: here
Reporting by Simon Johnson; Editing by Johan Ahlander and Alison Williams