Tuesday, May 13, 2008

Swedish Inflation Rate Rises to 5-Year High of 2.4%

Sweden's inflation rate rose to 2.4 percent in April, the highest in five years, adding to pressure on the central bank to keep its benchmark interest rate at a six-year high.

The underlying inflation rate, excluding mortgage payments, subsidies and indirect taxes, rose from 2.3 percent in March, Statistics Sweden said today. The rate was forecast to hold unchanged, according to the median estimate of 23 economists surveyed by Bloomberg. Prices increased 0.5 percent in the month.

The Riksbank left its benchmark rate unchanged at 4.25 percent last month, counting on slowing economic growth to help contain inflation, which has accelerated from 0.7 percent in August. The U.S. subprime mortgage market meltdown and ensuing global credit crunch is expected to shackle growth in Sweden, where half the economy consists of exports. The bank forecasts inflation will stay above the 2 percent target until 2011.

"Going forward, we expect inflation to start rising again,'' said strategist Olle Holmgren at SEB Merchant Banking in Stockholm. "The driving forces are the same that kept inflation high today, namely food prices and energy prices.''

The Swedish krona was little changed at 9.2837 to the euro, compared with 9.2821 late yesterday in Stockholm.

The broader consumer price index rose an annual 3.4 percent in April, unchanged from March, the statistics agency also said. Prices climbed 0.5 percent in the month.

Prolonged

"Compared with the Riksbank forecast, this was slightly higher and as the petrol price has continued to climb, it's very likely that the gap compared with the Riksbank forecast will widen in the next couple of months,'' Holmgren said.

The Riksbank estimated on April 23 that its repo rate would remain at 4.25 percent until the first quarter of 2011, and estimated underlying inflation of 2.5 percent in 12 months time.

"The risk is that the inflation process will be more prolonged, abroad and in Sweden,'' Riksbank Deputy Governor Svante Oeberg said in a speech on May 8. "There is a slightly greater probability of an increase in the policy rate during the year than of a cut.''

A median of economists surveyed by Bloomberg expect rates to be cut by the second quarter of 2009, as sluggish international growth spreads to the Nordic region's biggest economy.

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