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Deflation 'surprise' hits Swedish economy

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Deflation 'surprise' hits Swedish economy
13:45 CET+01:00
Sweden has entered a period of deflation, new statistics show, with the development increasing expectations that the central bank will lower interest rates.
Consumer prices dropped by 0.2 percent from September to October, according to official figures published on Tuesday by Statistics Sweden (SCB).The overall inflation rate in October was ´-0.1 percent, down from 0.1 percent in September.
 
SCB cited declines in food prices (-0.9 percent) and fuel prices (-2.6 percent) as two contributing factors to the drop in Sweden's Consumer Price Index (CPI).The decrease was offset somewhat due to higher prices for clothing (up 1.1 percent) and recreation (up 0.5 percent).
 
 
The news of Sweden's deflation caught many analysts off guard, prompting Torbjörn Isaksson from Nordea bank to call the figures "surprisingly low".
 
"Now there is increased pressure on the Riksbank" to lower interest rates, he told the TT news agency.
 
However, he believed the central bank is nevertheless likely to leave rates unchanged due to Swedes' high levels of household debt, stemming primarily from mortgages.
 
"The housing market is still going strong," said Isaksson.
 
Sweden is not a member of the eurozone, for which the European Central Bank decided on November 7 to lower its key interest rate to 0.25 percent in a
disinflation climate.
 
"Today's low inflation clearly puts pressure on Riksbank (Sweden's central bank) to cut" the interest rates, Nordea bank economist Andreas Wallström
said on Twitter.
 
But economists at SEB bank forecast the Riksbank will cut the benchmark repo rate from 1.0 to 0.75 percent at it's next meeting on December 17th.
 
"We don't believe a cut would jeopardize the inflation target and/or have a large effect on household debt," the bank wrote in a note on Tuesday.
 
"A rate cut can be seen as in investment in the credibility of the inflation target."
 
The Riksbank's stated inflation target is 2.0 percent. The krona fell on the news both against the dollar (6.66 kronor/dollar) and the euro (8.92 kronor/euro), and market interest rates also fell.
 
Central bankers are usually nervous if inflation is steadily much below 1.0 percent because this can be a sign that the economy is slipping dangerously
towards a climate of falling prices, or deflation, which can set in motion a vicious cycle of falling demand, rising unemployment, and further price falls.
 
Additional reporting: AFP 
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