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How could Sweden's success lead to deflation?

Angus Walker
Sweden’s economy, once called the ‘rock star of the recovery’ has slipped into deflation. The March 2014 inflation figure is minus 0.6%.  A puzzling situation, given Sweden’s growth target at 2.7% and the country’s apparent immunity to the recent global economic crisis.    

The moral of the Swedish story seems to be that central banks shouldn't rush to raise interest rates at the first signs of recovery. Faced with a housing bubble, Sweden’s central bank hiked rates from minus 0.25% to 2% in a short period of time.  So is there a lesson for the ECB?

Saxo bank’s Head of Macro Strategy, Mads Koefoed, says that Sweden was right to raise rates when it did and thinks that the ECB case is very different to the Swedish example, despite pressure to take action to combat the threat of deflation in the Eurozone.    

Juhani Huopainen Juhani Huopainen
I do tend to think that Riksbanken's move to hike interest rates was wrong. Riskbanken has consistently failed to keep up with its two-percent inflation target - the only monetary goal the CB has had since 1995, when the country came to its senses and broke the ERM-fixing. (The second chart has current account balance/GDP in purple, realized CPI inflation in blue and the yellow columns show the difference to the two-percent inflation target).


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