Sweden's underlying rate of inflation fell more than expected in February according to new data, hitting a two-year low and signaling that the Riksbank could soon start lowering interest rates.
The core inflation rate, which excludes volatile energy and interest rate costs, rose 3.5% year-on-year last month. This was below economist projections of 3.6% and the Riksbank's own forecast of 3.7% made in November.
Core inflation is an important indicator watched closely by central banks as it reveals underlying price pressures in the economy. The bigger-than-forecast drop in Sweden's February reading suggests inflationary pressures may be easing more quickly than anticipated.
This strengthens the case for the Riksbank, Sweden's central bank, to begin cutting its benchmark interest rate from the current 4% level. Policymakers have said rate cuts could start in the first half of 2022, with most analysts predicting the first reduction coming in either May or June.
However, the timing remains uncertain as the Riksbank will want to ensure inflation is sustainably slowing before loosening policy again. Any delays to Fed tightening could also influence the Riksbank's path.
Lower electricity costs helped pull down Sweden's core inflation in February. High energy bills have squeezed household spending for over a year as the country undergoes an 18-month tightening cycle. However, signs of cooling price pressures should help the economy grow again after a 0.2% contraction in 2023.
