Inflation takes record tumble

Consumer prices fell on average 1.3 percent from November to December, mainly due to a sharp decrease in mortgage costs, new figures from Statistics Sweden (SCB) show.

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The annual rate of inflation - the average change in consumer prices over the past 12 months - decreased to 0.9 percent in December from 2.5 percent in November.

Analysts had, according to Reuters, expected a fall in consumer prices of 0.5 percent in December.

Cuts in mortgage interest rates are given as the main reason for the dramatic fall in prices and thus inflation. Falls in petrol prices as well as clothing and electricity also contributed to the record decline, according to SCB.

As a result of falls in the value of the Swedish kronor relative to major international currencies, higher prices were recorded for package holidays, vegetables and transport services which counteracted the decrease by 0.1 percentage points each.

The underlying inflation, according to the CPIX index, declined by 0.2 percent in December to 1.4 percent.

The dramatic fall in the rate of inflation was greater than most analysts had expected.

"This is the largest decline in Swedish inflation history," said Henrik Mitelman at SEB Merchant Banking.

"This makes it possible for the Riksbank to make aggressive cuts in the base rate. We believe that the Riksbank will cut the main base (repo) rate by 0.75 percent in February and by 0.75 percent in April.

This would mean that the repo rate would be cut to 0.5 percent by April.

"These large interest rate cuts are good news for the country's mortgage borrowers who will see their mortgage rates decline considerably," said Henrik Mitelman.

"I think that the Riksbank has been surprised that mortgage lenders have passed on the full cut in the repo rate, 1.75 percent in December," said Peter Kaplan at the Royal Bank of Scotland.

The next ordinary meeting of the Riksbank to consider the repo rate will be held on February 10th.

Market interest rates and the Swedish kronor fell after the publication of the SCB statistics.

The continued cuts and dramatic falls in inflation have changed the playing field in the wake of the global financial crisis in the autumn, according to Sven-Arne Svensson at Erik Penser.

"Uncertainty over what is going to happen is very great and one must therefore take all forecasts with a large pinch of salt," he said.