STOCKHOLM: Sweden's central bank will need to cut interest rates further to stop inflation undershooting its 2 percent target as the crown is stronger than expected due to the crisis in the euro zone, a leading economic think tank predicted on Wednesday.
The National Institute of Economic Research said it expected stronger economic growth in the Nordic state than elsewhere in Europe, but the pace would still be well down on 2010 and 2011, the recovery years after the global financial crisis.
"In order to speed up the recovery and make progress toward meeting the inflation target, monetary policy will need to be expansionary for a prolonged period," the NIER said in new forecasts.
"In the forecast, the repo rate will be lowered to 1 percent before year-end," it added. The central bank's benchmark repo rate is currently set at 1.5 percent.
The central bank kept rates unchanged at its most recent meeting in July, and said on balance it expected rates to remain at the current level for just over a year. Markets are forecasting a cut during that period.
The bank's next rate announcement is due on Sept. 6, but NIER said its forecast assumed that the rate would by cut by 25 basis points at the October and December policy meetings.
"If the crown were to continue strengthening, for example as a consequence of increased uncertainty about the future prospects for the euro, it might be necessary to lower the repo rate further," it added.
The Rijksbank's deputy first governor said on Tuesday that the bank was keeping an eye on the crown currency, which hit a 12-year high against the euro this month, reflecting the economy's resilience and posing risks to Sweden's export-driven economy.
The NIER said the crown was now at a level it had not expected it to reach before 2016.
It said that Sweden's economy was performing better than elsewhere in Europe, but said the underlying trend was less solid than gross domestic product (GDP) data showed.
"For the full year 2012, GDP is forecast to increase by a modest 1.3 percent," it added. That pace would rise slightly to 1.8 percent in 2013. Gross domestic product (GDP) expanded 6.2 percent and 3.9 percent in 2010 and 2011 respectively.
New data from an NIER survey also revealed a mixed economic picture. While consumer confidence for August was relatively steady at 5.4 points after 5.6 in July, manufacturing sector confidence slid to minus 9 from minus 3.
The services sector, on the other hand, has become more optimistic, the survey noted, even if the reading of 16 remained below the historic average, the NIER said.
"Levels suggest the manufacturing sector is moving sideways or declining slightly, while the domestic economy is growing at a sub trend rate," SEB bank said in a research note.
The NIER's previous forecast had pegged 2012 GDP growth at 0.7 percent while 2013 was seen at 2.3 percent.
"Growth in 2012 and 2013 will be too weak for the labour market to improve," NIER added.
"Instead, unemployment will rise to almost 8 percent at the end of 2013 and thereafter decrease. The weak economy and an appreciating krona will hold down inflationary pressure."
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