Sweden Riksbank Preview (May 7): On Hold and Most Likely Still For Some Time
Sweden sees the next Riksbank verdict on May 7, a decision that will not come with fresh official projections. But with inflation (Figure 1) and real economy numbers having undershot both its 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 will be the verdict next Thursday, even if it is accompanied by less friendly rhetoric. More likely, the Board will repeat its assertion of no change for some time to come but still qualified it somewhat by noting that amid Middle East conflict making the outlook 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.
Figure 1: Core CPI Inflation Still Surprising to the Downside
Source; Stats Sweden– 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% it last verdict in March. However, what was more important was if and how the Board changed its rhetoric. In this regard, it repeated its assertion of no change for some time to come but qualified it somewhat by noting 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 it has an outlook of a more significant fall-out from the war causing higher inflation requiring higher rates and an alternative in which rates need to be eased further due to lower inflation. The latter is all the more notable given the downside prices rise seen of late, this making the flash CP numbers for April due May 6 all the more important. The bottom line is that the Riksbank Board is in justifiable wait and see mode with its central policy scenario unchanged from that of three months previously.
Otherwise and as we have suggested repeatedly, the revised 2.2% Riksbank GDP projection for this year is still overly optimistic, possibly by a factor of two, with the Board having revised it down 0.4 ppt in March. In this regard, the real economy backdrop is still puzzling and meriting more of a reassessment. 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 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 promise 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.