Sweden Riksbank Review: Fresh Tightening Bias But Mildly So?
It is always notable how quickly things can change, especially when it is external events that precipitate a shift in the backdrop and outlook. Notably, with inflation (Figure 1) and real economy numbers having undershot both the Norges Bank and consensus expectations, the Riksbank might have been contemplating a fresh easing at this juncture if not for events in Middle East. But stable policy seems to be the accepted alternative in current circumstances and this was again the the verdict this month. However, there was a shift in the policy bias, as the Board did not repeat its assertion made in March of no change for some time to come. Instead, it noted that even amid Middle East conflict making the outlook very uncertain, it was in a good initial position to adjust monetary policy if required to safeguard the inflation target. However, we still see stable policy though to end-2027 and will look to minutes of the meeting (May 13) to see the extent to which fresh Board divisions may have (re)surfaced.
Figure 1: Core CPI Inflation Again Surprising to the Downside
Source; Stats Sweden & CE estimates – 3-mth seas adjusted m/m chg
Surprising hardly anyone, the Riksbank (again) kept policy on hold with the key rate left at 1.75%. However, what was more important was if and how the Board changed its rhetoric. In this regard, it did not repeat its (March) assertion of no change for some time to come or that amid Middle East conflict making the forecast very uncertain, it would adjust monetary policy if the outlook for inflation and economic activity so requires – this presumably suggesting a move in either direction. Indeed, its scenario analysis offered last in March had an outlook of a more significant fall-out from the war causing higher inflation requiring higher rates but alongside an alternative in which rates need to be eased further due to lower inflation. The latter is all the more notable given the repeated downside CPI outcomes see of late, with the drop in the just-released flash numbers for April only partly a result of the temporary cut in VAT on food. Indeed, even excluding food and energy as is evident in our calculated ‘core’ measure (Figure 1) this suggests underlying price dynamics of close to zero. Regardless, the Board has developed a tightening bias, presumably on the fact that the Iran conflict has proved more durable than it previously thought/hoped. In fact, it may even have hiked at this juncture, or given a more explicit tightening bias but could not do given the downside surprises in both recent CPI and real economy data.
Otherwise and as we have suggested repeatedly, the current 2.2% Riksbank GDP projection for this year made in March is increasingly optimistic, possibly by a factor of two, not least after what seems to have been a clear q/q drop in Q1. In this regard, the real economy backdrop is still puzzling and meriting more of a reassessment. But the outlook is even more puzzling given that GDP growth would have to average nearly 4% annualized in the rest if the year to get to the Riksbank outlook. Despite an apparent 2%-plus GDP jump in the last three quarters if 2025 (twice Riksbank thinking), the economy still looks soggy, not least in the labor market. Admittedly, much of the recent rise in unemployment to around 9% of late looks to be a result of increased participation, but does this reflect a need by households to boost what have been damaged (real) incomes; if so then there may be little respite with the rate staying around current levels for at least the rest of this year.
It is against this background where we now see a GDP growth outcome nearer 1.2% for this year, with weaker exports causing clear damage that, alongside the likely Q1 drop. Helped by fiscal policy and the anticipated fall back in energy prices we see GDP growth outcome nearer 1.7% next year. This very much suggests a negative output gap, at least until 2028.
As a result, the Board’s previous pointer of no change for some time to come is likely to be met and maybe with a clearer downside risks than upper. More likely, we still do not see any looming policy reversal, as we see this current policy rate (1.75%) staying in place through 2027, ie a little longer than the Riksbank which envisaged the first hike probably at end 2026.