Sweden Riksbank Review: Faster, But Not (Yet) Any Further?
A fourth successive rate cut was widely seen at this Riksbank meeting, but rather than the 25 bp moves seen hitherto, there was the 50 bp move (to 2.75%) that was hinted at as part of the two further cuts advertised at the last (September) meeting. What seems clear is that inflation worries have subsided against a backdrop on below target recent CPI readings only to be replaced by clearer worries about the (still contracting) real economy. This was an interim meeting with no formal updates of forecasts, so we are not surprised there will was different policy guidance at this juncture and no indication that a lower terminal rate is being considered, merely getting there a little faster. But we now still see the policy rate at 2.5% by year end and adhere to our long-standing policy rate forecasts of 2.25% by mid-2025, now the same as the Riksbank’s terminal rate but one we seeing being arrived at two quarters earlier. But deeper cuts are possible as even the Riksbank acknowledges (Figure 1).
Figure 1: Alternative Official Policy Outlooks Suggest Deeper Cuts Are Possible
Source: Riksbank
Indeed, it is clear that while lower inflation has provided the scope to ease policy in this speedier manner, the rationale is increasingly that from a weak economy. This time around the Board statement was clear that ‘there are still few clear signs of a recovery. To further support economic activity, the policy rate needs to be cut somewhat faster than was assessed in September. It is important in itself that economic activity strengthens, but it is also a necessary condition for inflation to stabilize close to the target’.
Policy Front-Loading?
Since the spring, it has been very much a question of how fast, not if, as far as policy easing was concerned for the Riksbank, with policy thinking having been markedly reshaped this year. From the Board’s perspective, by initiating easing relatively early in May, it was both reacting to weak data (both real and price wise), but more notably in giving itself flexibility to pursue what it then thought needed to be a gradualist approach to further easing. That now has changed and increasingly radically with policy put into a faster gear to front-load, both a result of an undershoot of inflation (partly energy related but ever clearer in terms of short-run dynamics) but as suggested above increasingly due to a still weak economy which has failed to grow on balance since end-2021, albeit with clear quarter-to-quarter volatility.
Terminal Rate Scenarios
The question is, if growth disappoints into 2025, will the Riksbank ease further than it is now flagging. This is entirely possible – indeed, the Riksbank scenario analysis suggests that the policy rate could drop below 2%, at least temporarily (Figure 1). Supposedly, this would have to be a result of the weaker growth backdrop accentuating disinflation, but other factors may come into play, not least policy moves elsewhere which may result in a greater and unwanted appreciation of the currency than currently envisaged by the Riksbank.