UPDATE 1-Swedish retail sales fall bolsters rate cut hopes

Fri Sep 28, 2012 5:45am EDT

* August sales sown 0.4 pct mth-on-mth, vs forecast up 0.2 pct

* Sales up 1.8 pct yr-on-yr, vs forecast 2.7 pct (Adds detail, background, analysts, crown reaction)

STOCKHOLM, Sept 28 (Reuters) - Swedish retail sales fell unexpectedly in August, adding to signs the economy is starting to catch a chill from the euro zone debt crisis and raising the pressure for an interest rate cut.

While the Nordic country has shown surprising resilience to the crisis in southern Europe, its central bank cut its key rate earlier this month after a large downwards revision of second-quarter growth.

Retail sales fell 0.4 percent in August month-on-month, the statistics office said on Friday, compared with a forecast for a 0.2 percent rise in a Reuters poll. Sales were up 1.8 percent year-on-year, lagging a forecast for 2.7 percent.

"It indicates that third-quarter private consumption will be weaker than expected and it increases pressure on the Riksbank (central bank) to lower interest rates in October," Danske Markets economist Roger Josefsson said.

"Several indicators point to significantly weaker GDP growth in the third quarter than the Riksbank expects."

The Riksbank has said it will hold interest rates until late 2013 before raising. However, many investors expect at least one more rate cut. The weaker than expected retail sales figures will fuel that sentiment.

Jussi Hiljanen, head of fixed income research at SEB, said the market was pricing in a 36 percent chance of a rate cut in October when the central bank next meets and sees a rate cut before the end of the year as a near certainty.

The gloomy retail data chimed with figures earlier in the week showing weakening consumer and manufacturing sector confidence and the lowest trade surplus since December. ID:nL5E8KQ209]

Some analysts expect private consumption to keep growing, albeit at a modest pace.

"August was really weak partly due to the weather. We are cautiously optimistic for the rest of the year considering the rate cut and that consumer confidence is holding up relatively well," Swedbank analyst Per Sellden said.

"We still think the repo rate will stay unchanged, but the risk has tilted towards a rate cut at the end of the year."

The crown, which has eased off 12-year highs seen last month, stood at 8.43 to the euro at 0943 GMT.

July retail sales were revised down to 0.2 percent growth on the month and 2.3 percent annual growth. (Reporting by Anna Ringstrom, additional reporting by Olof Swahnberg)

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