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By Bloomberg

Sweden’s economy grew much faster than the Riksbank and economists predicted last quarter. But the fine print reveals a landscape that’s unlikely to help policy makers fight disinflation.

Much of the 1 percent increase in gross domestic product came from net exports, primarily services, and public spending. Investments and household demand were both weaker than some economists had predicted. With consumer prices down an annual 0.4 percent in June after continual bouts of deflation since late 2012, some of Sweden’s biggest banks say the Riksbank may need to drive its main rate -- now minus 0.35 percent -- even further below zero.

Aake Gustafsson, senior economist at Swedbank AB, says significant improvements in productivity and weaker domestic demand “mean that the inflation pressure remains very low.”

“There is also still very low inflation pressure internationally, we have falling commodity prices and a mild global recovery,” Gustafsson said in a telephone interview on Thursday. “The Riksbank will have a hard time getting inflation to rise toward its target.”

Rates Vs QE

Sweden’s central bank hasn’t managed to hit its 2 percent price-growth target for more than three years. In February, it resorted to negative rates and quantitative easing in an unprecedented stimulus drive designed to revive inflation.

Nordea Bank AB, Scandinavia’s biggest lender, says policy makers will need to deliver more. That’s even though the annual GDP growth rate reached 3 percent last quarter, according to preliminary figures released by the statistics office, well above the Riksbank’s 2.5 percent estimate.

“Focus is on the too-low inflation, which is why we stick to our view that the Riksbank will cut rates again in September,” said Torbjoern Isaksson, an analyst at Nordea. “Moreover, the flash estimate is often revised and should be taken with a pinch of salt.”

Olle Holmgren, an analyst at SEB AB, says “the stronger second-quarter growth will in our view have a very marginal impact on the prospects for another rate cut in September.”

While Swedbank’s main scenario is for the Riksbank to remain on hold in September, there is a “high probability” of further stimulus, Gustafsson said. That will most likely take the form of more rate cuts, he said.