Crucial H2 for Sweden CPI

A cursory glance at a few of Sweden's macro-fundamental indicators would suggest an economy that is humming along healthily and in no need of monetary stimulus. GDP in Q2 expanded at a healthy clip of 0.7% q/q (in line with average long-term growth rates), retail sales continue to show rude health by consumers, and unemployment rates (though above long-term averages) are trending lower. 

Yet, the Riksbank continues to embark on an aggressive monetary easing stance, most recently displayed in its July meeting when it took the benchmark policy rate deeper into negative territory at -0.35% and expanded government bond purchases by a further SEK 45bn, taking total purchases to SEK 135bn. 

This is because Sweden continues to struggle with low inflation. In fact, the latest figures actually show headline prices falling 0.4% y/y. To be fair, underlying inflation (CPIF) has been gradually trending higher. From a low of 0.0% y/y in March 2014, CPIF has managed to creep up to 0.6% over the past 15 months.

"Nonetheless, assuming the same trend pace, CPIF will only hit the 2% inflation target come Q1-Q2 2018, two years too late for the next major collective wagebargaining round in spring 2016. Unless inflation picks up rapidly by then, employers will be in a strong position to negotiate down wages closer in line with inflation, which in turn will put downward pressure on future inflation, making the task of battling low inflation even harder for the Riksbank", says RBC capital markets. 

Given the Riksbank's focus on SEK, any SEK strength will be capped, leaving it vulnerable to further monetary easing as the pressure on the Riksbank builds in H2 if the pace in CPI recovery does not pick up.