Sweden's Deflation Nightmare: Economists Expect A Riksbank Rate Cut Next Week

Remember when people argued Sweden was a model economy?

Fifteen months (and a scandalous mutiny) later, a lot has changed.

Deflation has arrived, just as former deputy governor Lars Svensson predicted before stepping down over resistance to rate cuts. The latest CPI number in September was -0.4%.

The current repo rate is 0.25%, and the Sweden's central bank, the Sveriges Riksbank, is expected to cut it another 10-20 basis points at its policy meeting next week. The chart to the right illustrates what the Riksbank's recent repo rates (and official forecast) look like.

The bank officially says it will keep rates flat, and expects to raise them in late 2015.

Other experts are less optimistic. Morgan Stanley's Marcus Gedai and Elga Bartsch wrote in a note this week that they expect the bank to cut the rate by 10 basis points at this meeting, leaving itself room to cut even more later if needed. Walker England over at Daily FX thinks there's going to be an even bigger 15-20 bp cut.