Swedish economy ups pace in Q3, supports Riksbank hike plans

STOCKHOLM — Sweden’s economy accelerated slightly in the third quarter from a tough start to the year, data showed on Friday, providing some support for the central bank’s plan to increase the benchmark rate at its meeting in December.

The economy grew 0.3% percent in the third quarter from the previous three-month period, and expanded 1.6% from a year earlier, the Statistics Office said.

Analysts in a Reuters poll had forecast growth of 0.2% and 1.8% respectively. The Riksbank had forecast annual growth of 1.96%.

The economy stalled early this year and growth remains sluggish, not least because of a correction in the housing market which has hit construction and made households less willing to spend.

Nevertheless, the Riksbank is expected to tighten policy for only the second time since mid-201l, when it announces its rate decision on Dec. 19.

“I think its difficult for the Riksbank to back off from the rate hike in December,” said Torbjorn Isaksson, an economist at Nordea. “The timing is bad but they will nevertheless hike rates in December.”

The Swedish crown initially eased after the figures but later strengthened against the euro. It has gained around 2.4 percent in November versus the euro as doubts about the Riksbank’s intentions in December have faded.

Many analysts, however, question the need for an increase.

Inflation is far below the 2% target and not expected to be stable at that level until 2022. Inflation expectations have also eased and a trade war between the United States and China and Britain’s exit from the European Union remain concerns.

An increase would also put the Riksbank out of synch with the European Central Bank and the Federal Reserve in the United States which have both eased policy recently.

But the majority of rate-setters at the central bank say the economy does not face a sharp downturn. Inflation, though below target, is good enough, according to Riksbank Governor Stefan Ingves.

Many analysts suspect the central bank is driven by a desire to end nearly five years of negative rates to give itself more room for maneuver should the downturn intensify.

“Today’s numbers are not likely to move the stance of the Riksbank, hence the December rate hike remains rock solid,” SEB economist Marcus Widen said in a note.

The benchmark repo rate turned negative in February 2015, dropping to -0.50% a year later. The Riksbank hiked in December last year to -0.25% and tightening in December would bring the repo rate back to zero.

GRAPHIC: Sweden economy: http://tmsnrt.rs/2bylYpf GRAPHIC: Riksbank rate, inflation and the Krona: http://tmsnrt.rs/1qEN4Rz

(Reporting by Simon Johnson, additional reporting by Colm Fulton; editing by Niklas Pollard and Timothy Heritage)