Sweden signals rates on hold as CPI in line

Swedish inflation is likely to be in line with the central bank's target over the next two years, Riksbank governor Lars Heikensten said on Monday, firming market expectations of no change in interest rates this week.
The bank targets two percent inflation with a plus or minus one percentage point margin over a two year business cycle.
"The inflation rate two years ahead still appears to be in line with the Riksbank's target," Heikensten said in a prepared speech ahead of a monetary policy meeting on Thursday.
The crown and debt prices were steady after his remarks.
"We interpret the speech as a whole as neutral. We still believe the Riksbank will increase interest rates after the end of this year," said Michael Grahn, economist at Danske Consensus.
Consumer prices grew 0.7 percent year-on-year in July and the underlying inflation index, which the central bank closely watches in its policy decisions, was 1.1 percent.
Heikensten said price growth would stay under control despite Sweden's faster than expected economic growth this year as the expansion was based on rising productivity amid a subdued labour market.
Economists believe the Riksbank will raise rates when it sees that the economic recovery has filtered through to the labour market, but Heikensten said this has not happened yet.
"The labour market has shown relatively weak development so far, and there is as yet no clear sign of a rebound," he said. "However, the recovery in economic activity signals that there will be an improvement."
Economists expect the unemployment rate to rise to 6.0 percent in July from 5.8 percent in June. The unemployment data is due at 1100 GMT on August 19.
The Riksbank also saw little impact on its policy from the record high oil prices, which Heikensten expected to fall in coming years.
"As monetary policy focuses on developments in inflation a couple of years ahead, the present high oil price need not have any great monetary policy significance," he said.
Most economists polled by Reuters expect that the central bank will increase the repo rate, at historic lows of 2.0 percent since April, by 25 basis points in the last quarter of this year or the first quarter of 2005.
The Riksbank, which has said that rates would eventually have to rise, will announce its decision from the Thursday meeting on Friday at 0730 GMT.