April 26, 2018 / 8:36 AM / 10 months ago

Swedish central bank postpones rate hike amid nagging inflation worries

STOCKHOLM (Reuters) - Worries about low inflation forced Sweden’s central bank to postpone plans for tightening monetary policy for the first time in seven years until the end of 2017 on Thursday, despite economic growth most European countries would envy.

The Riksbank kept rates at -0.5 percent, as expected. It has now held rates in negative territory since early 2015 and policy is looking increasingly out of step with an economy that has enjoyed years of strong growth and is seen expanding 2.6 percent in 2018.

But the majority on the Riksbank board remain worried about inflation and plans for a first rate hike since July 2011 keep getting pushed back.

“(The Executive Board)... assesses that the rate will begin to be raised towards the end of the year, which is somewhat later than previously forecast,” the central bank said in a statement.

“The risks of too low inflation merit particular attention, as at the prevailing interest rate levels this is more difficult to manage than inflation that is too high.”

Deputy Governor Henry Ohlsson voted for an immediate interest rate hike of 25 basis points, maintaining his position from the previous meeting in February.

The Swedish crown weakened after the decision.

“This was a little more dovish than expected given the Riksbank does not expect a full hike in December,” said Jonas Goltermann, economist at ING Financial Markets.

“Also data, especially CPIF, has been disappointing lately. There is significantly less demand in the domestic economy than they thought. There is something going on in the economy that their model is not picking up,” he added.

The Riksbank’s favoured measure of consumer prices - CPIF which excludes mortgage effects - has been roughly on target since early last year. But stripping out volatile energy prices, inflation peaked in July last year and has since undershot the Riksbank’s forecasts.

The combination of strong economic growth and low inflation has puzzled Riksbank board members and economists. A Reuters poll showed the Swedish economy will continue to outperform Scandinavian peers in 2018, but is set to slow next year as the region’s growth converges around 2 percent.

The Riksbank does not want to get too far ahead of the European Central Bank in tightening policy. The ECB meets later on Thursday, with analysts not expecting a change in stance.

But should worries about the global economy and a strong euro lead ECB policy-makers to turn dovish again, the Riksbank could be forced to push back policy normalization even further.

“We are expecting a first hike in December, but there is a risk that the Riksbank will have to postpone the first hike even further since the inflation might not rise a much as they expect,” SEB economist Olle Holmgren said.

Additional reporting by Johan Sennero Editing by Toby Chopra and Niklas Pollard

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