March 28, 2017 / 3:28 PM / in 4 months

Inflation, crown and ECB weigh on Sweden's Riksbank

2 Min Read

FILE PHOTO:Sweden's Riksbank building is seen in downtown Stockholm December 4, 2008.Bob Strong/File Photo

LONDON (Reuters) - Sweden's Riksbank has a problem: rising inflation, a strengthening crown but interest rates pretty much stuck at just below zero.

As the following graphic -bit.ly/2nqGZba -shows, the spread between the repo rate and inflation has blown out over the past two years, even if the latter is still below a comfortable 2 percent.

The European Central Bank is pretty much to blame. The Riksbank cannot afford to raise rates until the ECB does because the crown would likely become stronger than it is now.

The Swedish currency has been much stronger against the euro in the past, but a jump would risk a slide back towards deflation seen two years ago.

The central bank is already worried that recent price rises have been driven by temporary factors and wants to see inflation on firmer ground before it acts.

Until then it is likely to ignore surging GDP, falling unemployment and an ever hotter housing market, signals that in more normal times would have already triggered tighter policy.

Reporting by Jeremy Gaunt and Simon Johnson; Editing by Susan Fenton

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