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Swedish economy slowing in Q4 as Riksbank rate decision looms

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STOCKHOLM — Swedish industrial production fell sharply in October, data published on Friday showed, but a weak start to the fourth quarter for the economy may not be enough to prevent the central bank from hiking rates at its meeting this month.

Overall production was up 0.2% on the month and 0.4% from a year earlier, but the manufacturing sector went backwards, with production falling 3% percent from a year earlier and 1.3% from the previous month. New orders fell 5.4% on the year.

The production figures chimed with gloomy sentiment readings and with a drop in Germany’s industrial output which has revived worries about the global economic outlook.

“This was weaker than expected and indicates negative growth in the fourth quarter,” SEB economist Olle Holmgren said.

Despite a wide range of indicators pointing to a slowdown, the central bank has said it plans to raise rates this month.

The majority of rate-setters argue the economy is only slowing, not slumping, and that monetary policy would remain very supportive even after a quarter percentage point hike.

Many analysts, however, believe that the Riksbank’s main motivation is to draw a line under a period of nearly five years with negative interest rates.

They point to inflation below the 2% target and that it is not expected to be stable at that level for a couple of years. Inflation expectations – which can often spill over into actual outcomes – have slipped.

If it raises rates, the Riksbank will be moving in the opposite direction to most major central banks. The European Central Bank and the U.S. Federal Reserve have both cut rates in recent months.

The economic outlook is uncertain, with the trade dispute between the United States and China rumbling on and the effects of Britain’s exit from the European Union still uncertain.

Inflation and inflation expectation figures next week could still force a rethink at the central bank, but analysts are not betting on it.

“The timing is awkward and it is not a done deal, but the Riksbank will probably hike rates later this month,” Nordea economist Torbjorn Isaksson said.

The Riksbank will announce its policy decision on Dec. 19.

GRAPHIC: Sweden economy: http://tmsnrt.rs/2bylYpf GRAPHIC: Riksbank rate, inflation and the Krona: http://tmsnrt.rs/1qEN4Rz

(Reporting by Johan Ahlander and Simon Johnson; Editing by Alison Williams)

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