Commerzbank’s Michael Pfister and Norman Liebke describe how Swedish government tax and fuel measures have temporarily suppressed inflation, keeping the Riksbank on hold at 1.75% with hikes only expected late in the year. As fuel subsidies expire and counterfactual inflation already hovers near 2%, they see good reasons for a year‑end rate increase, while questioning market pricing of roughly 120bp hikes over 12 months.
Temporary measures mask price risks
“Unlike Norges Bank, the Riksbank did not issue any hawkish statements yesterday. The key interest rate was left unchanged at 1.75%, with the first rate hike not expected until the end of the year. “
“The measures adopted by the Swedish government since the start of the conflict in Ukraine are also playing a role here: i) Since April, the value-added tax on food has been temporarily reduced from 12% to 6%. According to consumer price data, businesses have passed this reduction on almost one-to-one. ii) Starting in May, gasoline and diesel prices at gas stations were reduced by 1 and 0.4 kronor per litre, respectively. iii) A further reduction in gas station prices of 3 kronor per litre was implemented in July. It is therefore unsurprising that Sweden is experiencing extremely low inflation, with the rate falling further at times since the start of the war.”
“The Riksbank expects prices to start rising again in spring, which is why it will keep an eye on counterfactual inflation despite current low inflation. With inflation currently at around 2% without the temporary measures, there are good reasons to raise the key interest rate at the end of the year in order to counter impending price risks.”
“The only question is whether the market’s expectation of rate hikes totalling nearly 120 basis points over the next 12 months is realistic. However, this will likely only become clear over time, and in any case, the krona is showing a complicated reaction to rate hikes that have been priced in more heavily”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
