Sweden Riksbank Review: Early Easing to Allow Gradual Moves
Even at it previous policy assessment in February it was clear(er) that the Riksbank accepted that it could and should make its policy stance less contractionary, at least in conventional terms. But its latest decision, again keeping the policy rate at 4%, and no change to the pace of bond sales, the Board was much more explicit that rate cuts are looming, and even as soon as the next meeting (May 8) or the following (27 June). This reflects a marked change in the policy outlook Figure 1) which now very much chimes with our own long-standing view, albeit where we see slightly faster and larger cuts, partly a result of less optimistic growth assumptions and the ensuing risk of a sustained inflation target undershot than the Riksbank envisages. Recent softer-than-expected CPI data have surely motivated this marked change in Riksbank thinking but it does seem as if the policy premise is that by easing earlier, the ever-cautious Riksbank has more flexibility and can subsequently ease more slowly to avoid possible policy errors should inflation start to return. Only the currency stands in the way of May rate cut?
Figure 1: Riksbank Has a Marked Change in Policy Thinking
Source: Riksbank Monetary Policy Report
A Clear Change of Heart
While this hint of earlier rate cuts is far from a Riksbank commitment, it contrasts to the H1 2025 schedule in its last set of formal forecasts released last November, which implied no move before Q2 next year (Figure 1). Indeed, this Riksbank change of heart is even more 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.
This is a reflection of easing worries about the krona, but mainly an acceptance that the inflation outlook has improved durably while the economy is weak, all suggesting that the stance of policy has scope and rational to be less restrictive. The Riksbank thinking may also be by easing earlier it can ease more gradually and or with more flexibility. This change of heart chimes with our long-standing forecast anticipating rate cuts from Q2, and some 75 bp cumulatively by end-year and something similar in 2025. We still think the economy will contract this year, not least as the Riksbank balance sheet shrinkage is aggravating the worrying and more intense contraction seen in bank lending and where recent solid activity signals may be more a reaction to unusual weather patterns than a clear recovery trend having emerged.
Thus we are less optimistic about the scale of the recovery, albeit agreeing with the Riksbank assertion that the current quarter may still see a further shrinkage and then a subsequent pick-up. Overall, our activity outlook is consistent with slightly larger (ie by some circa 35 bp) cumulative rate cuts we anticipate by end 2025. But with the Riksbank pointing to the economy picking up and growing above trend at over 2% in 2025 and in 2026, this still generates a negative output gap persists out and through 2026. We think this growth outlook is somewhat optimistic. But the point is that the Riksbank still accepts that even this more upbeat real economy outlook delivers price stability, if not a slight target undershoot.
Policy Considerations and Outlook
The Riksbank is explicit in suggesting the first cut may arrive at either of the next two Board meetings (decision due May 8 and Jun 27). The bar is not particularly high for a move in May as the Riksbank assumes that March CPIF inflation (due mid Apr) will actually be higher, albeit solely due to energy. Overall we think that something will have to occur to prevent a cut in May, even though that meeting will have no formal forecast update. Possibly the currency may be the main near-term consideration.
Regardless, the outlook is interesting. 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. But the Board envisages a much slower easing outlook of policy of some 150 bp in just under three years. This very much tallies with the view alluded to above that moving early allows the Board to act is such a gradual manner.
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%. It us unclear and the Riksbank Monetary Policy Report is ambiguous on this issue too whether the assumed 2.58 Q1 202 policy rate would still be considered to be restrictive and whether further cuts beyond then would be consider.