Sweden Riksbank Preview (Jun 27): Doing It Gradually
As much as the 25 bp rate cut it made last month was the clear hint of two further such cuts in H2 this year, this chiming with its policy outlook in the March (Figure 1) Monetary Policy Report (MPR) as well as our own long-standing view. By moving at that early juncture, the Board was both reacting to weak data (both real and pricewise, but more notably in giving itself flexibility to pursue what it thinks needs to be a gradualist approach to further easing. That would suggest no hurry to ease further implying a stable policy decision for next Thursday (Jun 27). Instead, and partly to try and cement the recovery in the currency since the cut, those advertised moves are likely to arrive at policy verdicts scheduled on August 20 and November 7. This may be more formally flagged in the updated MPR due next week this possibly sketching out a little clearer the outlook for 2025 (and beyond) over and beyond the pointer the Board gave towards 2-3 further such cuts next year. Indeed, it may confirm a resting point for policy by late 2026 of around 2.5%!
Figure 1: Policy Outlook Details
Source: Riksbank
It was very much a question of when, not if, as far as policy easing was concerned for the Riksbank. In this regard, albeit surprising somewhat in terms of timing, the Riksbank duly delivered last month, cutting its policy rate by 25 bp (to 3.75%), despite clear concerns it has flagged about recent and continued krona weakness. More notably, the Board, with no sign of any internal dissent, was explicit in highlighting a near-term policy path, advertising a likely two further such cuts in H2 this year. Despite that MPR pointing to further 2-3 such cuts next year, the Board was understandably coy about the longer-term outlook, noting risks from a strong US economy, weak currency and geopolitical tensions. By moving last month, the Board was reacting to weak data (both real and pricewise, but more notably is giving itself flexibility to pursue what it thinks needs to be a gradualist approach to further easing.
Inflation Subsiding and Broadly
Recent softer-than-expected CPI data have surely motivated this marked change in Riksbank thinking and this continued in the data released since the March policy verdict which undershot all expectation, not least the Riksbank. Admittedly, there was a pick-up in the May CPI data but this was probably a clear aberration due to one-off special entertainment events. This disinflation is very evident in seasonally adjusted m/m core CPI readings which have showed a much softer profile prior to May, very much hinting that ex-energy (core) inflation undershoots target earlier than that circa-Q1 2026 forecast by the Riksbank. Indeed, we think CPIF inflation (the actual targeted measure) may drop below target in coming months.
Policy Considerations
Despite the firm Q! GDP reading, we remain less optimistic about the scale of the recovery; nearly all of the 0.7% q/q rise last quarter was inventory based and we think this will partly unwind this quarter and possibly through H2. But even 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. The question is if growth disappoints into 2025 will the Riksbank ease further than it is now flagging – much may depend on fiscal policy!