On Thursday, the Sveriges Riksbank, Sweden's central bank, maintained its key interest rate at 4.00 percent for the second consecutive meeting, in line with expectations. The bank indicated the potential for a rate cut in the first half of this year, maintaining a contractionary monetary policy designed to stabilize inflation close to the target.
The latest rate adjustment was a 25 basis point increase in September. According to the bank, the risk of overly high inflation is receding, thus a rate cut could potentially occur sooner than predicted in the November forecast. The Riksbank stated, "If the prospects for inflation remain favorable, the possibility of the policy rate being cut during the first half of the year cannot be ruled out."
The central bank recognized that previous rate increases helped moderate inflation, creating an environment for low and stable inflation. However, they also noted that core inflation, which excludes volatile energy prices, remains elevated.
While inflation expectations align closely with the target and wage growth is moderate, the Swedish central bank expressed caution due to potential setbacks that may cause a resurgence in inflation. Factors include potential supply shocks due to geopolitical tensions, non-normalized pricing behavior from companies, and a possible substantial depreciation of the krona.
Capital Economics economist Andrew Kenningham said, "We would not completely rule out a first rate cut in March, depending largely on the January and February inflation data, but think May is still more likely." He further predicted a fall in rates by 100bp to 3.0 percent by year-end and 2.5 percent by the end of next year, mirroring the expectations priced into financial markets.
