(Bloomberg) -- Shackled with anemic inflation, Sweden's central bank will probably face the next economic recession with its key interest rate still well below zero.
That's what Captor Investment Management is betting. Wage growth won't be high enough to bring price pressure back to the largest Nordic economy and with the upswing reaching a mature phase, it's very likely inflation won't stabilize around 2 percent before the next downturn starts, said Daniel Karlgren, who manages Captor's 1.4 billion-krona ($130 million) fixed income fund, Iris Ranta.
“It's starting to look like a Japan scenario where we will get an economic downturn before rates go up in Sweden or the euro zone,” he said in an interview on Monday.
Just two months after the Riksbank ended its quantitative easing program and started laying the groundwork for raising rates this year, minutes from the February rate meeting showed that 5 of the bank's 6 policy makers discussed delaying tightening. This was almost exactly three years after the Riksbank cut rates below zero and started a bond-buying program to jolt the economy out of a cycle of deflation.
“The Riksbank will keep saying that their first rate hike is six months ahead and then they end up doing nothing or even cutting rates,” Karlgren said. “We still have a very steep Swedish swaps curve and as long as that is the case, our strategy works well.”
While many fund managers may consider shortening their duration to limit their sensitivity to higher rates, Captor Investment Management is sticking to a long duration and has a roll-down strategy (selling bonds before they mature) that benefits from stable rates.
Captor Iris Ranta mainly invests in the long end of the swap market, which matches the liabilities of its clients, of whom a majority are pension funds.
Wage increases for German industrial employees often acts as a benchmark for their Swedish peers and in February, Germany's most powerful labor union IG Metall and employers reached a deal in the key state granting workers a 4.3 percent pay increase over 27 months. According to Eurostat, Swedish estimated hourly labor costs are among the highest in the European Union, lagging only Denmark and Belgium.
Political decisions that drastically improve the outlook for wage increases would be needed to get a sustained upturn in inflation, according to Karlgren. But that's outside the control of central banks and would need coordination between countries and is therefore likely to take time, he said.
To contact the reporters on this story: Hanna Hoikkala in Stockholm at hhoikkala@bloomberg.net, Love Liman in Stockholm at jliman1@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Jonas Bergman, Tasneem Hanfi Brögger
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