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By Bloomberg

Sweden’s central bank may have won the inflation skirmish in May, but the biggest test is still to come.

A report showed consumer prices unexpectedly rose last month, beating estimates of both the Riksbank and analysts. In response, all of Sweden’s biggest banks, including SEB AB and Nordea Bank AB, revised forecasts and said that further Riksbank measures are no longer likely at the next meeting in July.

“It’s much too early to say that the Riksbank has won the fight to get inflation up,” said Johan Javeus, chief strategist at SEB in Stockholm. “The Riksbank earlier this year said that inflation had bottomed. Then they had two rounds of negative inflation surprises and now it’s back on track again.”

Policy makers have been pulling out all the stops to prevent a deflationary spiral from taking hold in the largest Nordic economy. The bank cut its main rate to an unprecedented minus 0.25 percent and has pledged to buy as much as 90 billion kronor in government bonds to drive down long-term rates.

The krona rallied more than 1 percent against the euro after the inflation report while September futures on the bank’s repo rate rose one basis point to minus 0.29 percent.

The inflation report was the second good piece of the news for policy makers this week. A survey by TNS Sifo Prospera on Wednesday showed five-year inflation expectations -- a key gauge for the bank -- rising for the first time in four years.

Avoids Repeat

The May inflation data “caps a week of positive inflation news in Sweden,” Colin Bermingham, an economist at BNP Paribas SA, said in a note. “This makes a rate cut ahead of the July 2 policy meeting less likely though we maintain our central view that rates will be cut by another 15 basis points.”

The report was crucial after the Riksbank suffered an inflation shock last month, when data showed that annual consumer prices unexpectedly declined 0.2 percent. Deputy Governor Per Jansson on May 26 said that “there can’t be a repeat” of inflation deviating that much.

Policy makers forecast a quick acceleration in inflation over the second half of next year and see it meeting their 2 percent target already in January.

Price growth hasn’t reached the target since late 2011 and the bank has signaled it can act between regular board meetings by cutting rates further, expanding bond buying, start lending to companies or intervene in the currency market.

‘Big Test’

“Whether inflation will accelerate as quickly toward their target as they predict will be a big test,” Javeus said. “It’s not the first time the Riksbank has had a similar forecast profile, only to see that reality hasn’t picked up as quickly.”

At its latest regular meeting in April, the bank surprised by leaving rates unchanged and instead chose to expand its bond- purchasing program. The bank in March delivered an unscheduled rate cut to cap gains in the krona.

Martin Enlund, chief analyst at Nordea, said the central bank is far from out of the woods as it will likely fail to get the kind of wage deals necessary.

Still, it’s likely to hold off next month because it has been “reactive recently, and seems content with what they’ve done so far,” he said in an e-mail. “Board members such as Per Jansson have expressed confidence (hubris) in the Riksbank’s (in our view too high) inflation forecast, and today’s outcome seem likely to boost their confidence in this. Aside from the krona, it is not clear the Riksbank will need to do more in July.”