STOCKHOLM, Sept 28 (Reuters) – Sweden’s economic growth will grind to a halt next year amid soaring inflation and interest rate rises, casting a pall over households and businesses as they prepare for rough times ahead, data showed on Wednesday.

The economy started the year strongly but the effects of the war in Ukraine and the surging prices for energy it has brought with it are increasingly being felt.

Gross domestic product is expected to contract in 2023 – if only by a marginal 0.1% – following growth of 2.7% this year, the National Institute of Economic Research (NIER) said in a forecast on Wednesday.

The NIER saw headline inflation averaging 7.7% this year and 4.6% in 2023, both higher than expected in August.

The central bank targets 2% inflation.

Headline inflation hit 9.0% in August, prompting the Riksbank to hike the policy rate by a full percentage point – the most aggressive one-off tightening since the early 1990s. read more

More is set to come as the central bank frontloads its response to inflation at 30-year highs and tries to prevent prices from continuing to spiral upward.

“Probably the most important message I have is that, yes, households and businesses will feel the effects of tighter monetary policy, but if inflation shoots up like in the 70s and 80s, it would be even worse and much worse,” central bank Deputy Governor Per Jansson said on Wednesday during a speech.

The economy was already slowing and higher rates will further dampen demand.

Separate data on Wednesday showed overall consumer and business sentiment at its lowest since August 2020, though still well above the spring of that year when Sweden was in the grips of the COVID-19 pandemic.

Retail sales were down 5.1% in August.

The gloomy outlook has already hit the housing market, where prices are expected to fall as much 20% from a peak in spring to the trough next summer.

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