Swedish Riksbank Signal Rate Hike, Phases Out Core Inflation Target

The Swedish Riksbank today signaled that they would no longer target the Swedish version of core inflation, but that they would target all-items price inflation. Sweden's core inflation measure was somewhat different from that in other countries in that it excluded the effects of consumption tax changes and mortgage interest, and not food and energy. Personally, I always found this core measure to be more justified than the American version. This goes particularly for mortgage interest, which at least in the short term rises due to central bank rate hikes -or falls from central bank cuts- making the central bank so to speak chase its own tail.

Anyway, the practical implication of this is to make the Riksbank more hawkish, as the all-items index has increased more than the core index. Considering this, the Riksbank seems almost certain to raise interest rates soon, and will probably do it more later this year. Considering that although M2 growth has slowed, it is still near 10%, that is arguably justified. It remains to be seen whether the short term negative growth effect of this tightening will be enough to push Sweden into a recession, or whether the positive effects from the government's tax- and unemployment benefit cuts can prevent this. But it seems very clear that Swedish growth will slow significantly.