Sweden Riksbank Review: Easing Flagged as Policy Can be Less Contractionary
It is ever clearer that the Riksbank now accepts that it can and should make its policy stance less contractionary, at least in conventional terms. In its latest decision, keeping policy at 4%, albeit increasing the pace of bond sales from SEK 5 billion to 6.5 billion per month, it noted that the possibility of the policy rate being cut during the first half of the year cannot be ruled out. White this is far from a commitment, it contrasts to the H1 2025 schedule in its last set of formal forecasts released last November. This is reflection of easing worries about the krona, an acceptance that the inflation outlook has improved while the economy is weak, all suggesting that the stance of policy has scope and rational to be less restrictive. The thinking may also be by easing earlier it can ease more gradually. This change of heart chimes with our forecast anticipating rate cuts from Q2, and some 100 bp by end-year. We still think the economy will contract this year, not least as the Riksbank balance sheet shrinkage is aggravating the worrying contraction seen in bank lending (Figure 1).
Figure 1: Credit Slumping?
Source: Stats Sweden
Policy Biting
Recent data have continued to be been mixed, with slightly perkier tones to business surveys, largely due to firm exports, but fresh hints that GDP is contracting again. But both the much weaker underlying inflation picture (Figure 1) and what may be growing Board concerns about financial stability risks inter-related with growing weakness in bank lending and deposits have argued for an easing in policy, something we think may occur in by the next quarter. Notably, the Riksbank change if heart is marked as only last November it was not formally ruling out a further hike even though it then envisaged current policy inflation will return to target and stay there in the latter part of its 2-3 year forecast horizon, albeit with some volatility due to energy prices.
After an unprecedented 400 bp cumulative rate rises seen in 21 months, this helps produce a sizeable output gap persisting out to 2026, embracing a cumulative near-2 ppt GDP drop by mid-2024, this partly responsible for the already slumping price pressure picture.
Meeting Scheduling Outlook
The number of Riksbank monetary policy Board meetings has varied over time. However, the Board now sees a need to increase the number of ordinary monetary policy meetings to eight per year from the previous five. The rationale is to make it easier for the Riksbank to adapt monetary policy more rapidly to the prevailing situation and communicate a coherent view on economic developments more often. Rather than at every meeting, only at four of the eight monetary policy meetings, will there now be a Monetary Policy Report with forecasts including an interest rate path will be published. No new forecasts will be published at the other four meetings and this includes this February decision where a more limited monetary policy update was instead be provided.
Some insight into the change of thinking will come with the publication of the minutes to this meeting on Feb 7 as well as a keynote speech from Governor Thedeen next Tuesday. But the next policy meeting decision on Mar 27 will have a fresh set of forecasts which may more formally flag a rate cut at the following meeting of May 7
Plunging Price Pressures?
Clearly, the Riksbank continues with an explicit admission that policy is restrictive, as the Riksbank has taken policy to a terminal rate of around 4%. Belatedly, the Riksbank has begun to accept an improving inflation picture and outlook, noting that these hikes have contributed to lower inflationary pressures and to inflation expectations being firmly anchored around the 2% inflation target while wages are increasing only moderately. In addition, it noted that in November and December, inflation continued to fall, and when measured in terms of the CPIF excluding energy, it was lower than expected.
This did see the y/y rate slump in December with the CPIF almost back down to target, albeit mainly due to base effects which will reverse in the next set of numbers. Amid these distortions, a clearer perspective is provided by seasonally adjusted m/m readings (computed by CE) for both overall CPIF and the CPIF ex-energy. Indeed, such adjusted data show a very much softer profile of late, even excluding energy with the CPIF measure consistent with m/m outcomes averaging around 0.1% in the last few months (Figure 2). Thus, from our standpoint, the risks may be that inflation returns to target earlier and possibly undershoots target than the end-year schedule thought by the Riksbank.
Figure 2: Underlying Adjusted inflation Down Markedly
Source: Stats Sweden with seasonal adjustment made by CE and smoothed is 3 mth mov avg
Financial Stability Considerations
We would also suggest that the bond sales the Riksbank is carrying out (and is ramping up) in order to reduce its balance sheet are also having an effect in buttressing the official policy hikes, they helping explain the marked drop in bank credit and deposits now occurring (Figure 1). This issue has not been something that the Riksbank has overtly acknowledged but that may be changing. The recent Riksbank Financial Stability Report very much stressed that higher interest rates are squeezing Swedish property companies, to which domestic banks are very exposed so that while the Swedish financial system is functioning well overall risks remain elevated.