Swedish NIER think tank sees milder downturn, rates to peak at 3.75%

STOCKHOLM (Reuters) - Sweden's economic downturn this year will not be as deep as previously expected, the leading NIER think-tank said on Wednesday, though households will remain under pressure from a cost of living crisis and higher mortgage rates.

The NIER forecast the economy would shrink 0.6% this year against its previous forecast of a contraction of 1.1%. It also lowered its forecast for unemployment, though it expects inflation to be higher through 2023.

"Households real, disposable incomes will fall this year and as a result they will significantly cut back on consumption," the NIER said in a statement.

"At the same time housing investment will drop sharply as a result of lower house prices and high production costs."

Sweden's economy has slowed in recent months, but like many other countries, the impact of the cost of living crisis sparked by the war in Ukraine and the lingering effects of the pandemic has been milder than initially expected.

Uncertainty is high, with financial turbulence sparked by problems at regional banks in the United States yet to have settled down.

Nevertheless, Swedish business and household sentiment edged higher in March, the second month in a row where the outlook has brightened.

Hard data, however, paints a less promising picture with retail sales dropping sharply in February, while inflation is still picking up.

As a result, the NIER forecast the central bank would hike its policy rate to 3.75% by July, which would mark the peak in the policy rate.

"The NIER's forecast is that the Riksbank will then start a series of rate cuts at the start of next year to stimulate demand in the economy," it said.

(Reporting by Simon Johnson, editing by Terje Solsvik and Niklas Pollard)