Sweden’s Riksbank holds key rate, could speed up cuts this year

SWEDEN’S central bank held its key interest rate at 3.75 per cent as expected on Thursday (Jun 27), and said that if inflation prospects remained the same, the policy rate could be cut two or three times during the second half of the year.

In May, when it cut the policy rate for the first time in eight years, the Riksbank had said it expected two more cuts in 2024, and the Swedish krona weakened against the euro on the more dovish tone from central bank.

“Given that inflation is fundamentally developing favourably, economic activity is assessed to be somewhat weaker, and the krona exchange rate is a little stronger, the forecast for the policy rate has been adjusted down somewhat,” the Riksbank said in a statement.

“If inflation prospects remain the same, the policy rate can be cut two or three times during the second half of the year.”

Headline inflation, which peaked at over 10 per cent late in 2022, is close to the central bank’s 2 per cent target and likely to fall further.

The Riksbank cut its inflation forecast for this year to an average of 2 per cent from 2.3 per cent, and expects it to remain under the target level through 2026. Inflation averaged 6 per cent in 2023.

In addition, the economy remained weak, with many households struggling with mortgage payments, making rate cuts a welcome prospect.

“We stick to our forecast of three additional cuts this year, but bring forward the second cut to August,” Swedbank said in a note. “We forecast that the policy rate will be cut to down to 2 per cent by the end of 2025, which is our estimate of a normal level.”

The Riksbank, however, also struck a note of caution.

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The pace of inflation picked up slightly in May, highlighting the risk for setbacks, while the start of policy easing in the US has been delayed. The European Central Bank is also wary of sticky price pressures.

Sweden’s neighbour Norway last week pushed back its prediction for a rate cut and now sees policy easing starting early next year.

“There are risks linked, for instance, to inflation abroad, geopolitical unease, the krona exchange rate and the recovery in the Swedish economy that can lead to the policy rate being either higher or lower than forecast,” the Riksbank said.

The central bank will announce its next policy decision on Aug 20. REUTERS