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Swedish inflation rises above 2% target for first time since 2010

A key measure of inflation in Sweden has surpassed the Riksbank’s 2 per cent target for the first time in more than six years, prompting a rally in the krona as investors hope for an acceleration of the central bank’s steps to normalise monetary policy after years of aggressive stimulus.

Year on year consumer price inflation with a fixed interest rate (CPIF) rose from 1.9 per cent to 2.4 per cent in July, its highest level since February 2010. The data came in above market forecasts for the third month in a row – consensus estimates had predicted a 2.1 per cent increase, while the Riksbank had expected growth of only 1.8 per cent.

Regular consumer price inflation also hit a more than five-year high, rising from 1.7 per cent to 2.2 per cent on a year on year basis. Prices rose 0.5 per cent over the month.

The Riksbank’s decision to remove its easing bias in June helped the krona to recover after weakening more than 4 per cent over the prior five months, but it has since struggled to hold onto any further gains, oscillating within a fairly tight range.

Today’s news gave it another boost, and the currency was up 0.6 per cent against the euro at publication time.

However, analysts have warned against getting too carried away by the prospect of imminent interest rate rises given the Riksbank’s notorious cautiousness.

Although the central bank has acknowledged it is unlikely to make any rate cuts, it has continued to stress that it will not tolerate too rapid a currency appreciation which could drive inflation back down. In the minutes of its last policy meeting the bank’s executive board explicitly warned that “it is important that the market does not pre-empt future rate increases”.

Analysts at ING warned this morning that “we don’t expect the July Swedish CPI data to prompt a reaction from the Riksbank as the central bank has a long history of erring on the cautious side due to concerns about a strong krona. Thus, any boost from a strong CPI release may prove to be one-off”.