(Bloomberg) -- The Swedish Riksbank is likely to resume interest-rate cuts on Tuesday, as the inflation rate has fallen below the central bank’s target and pressure is mounting on officials to aid an ailing economy.
All economists surveyed by Bloomberg expect policymakers to settle for a quarter-point cut to 3.5% and to resist calls for a larger reduction from analysts and trade groups who argue that the Swedish economy needs more relief imminently.
“It’s clear that inflation will be below the target going forward,” Swedbank AB Chief Economist Mattias Persson said in an interview. “Sweden’s economy is in a downturn, the labor market is weak and it’s important to adjust monetary policy. The risk now is that actions are taken too slowly, which would mean a subdued recovery and perhaps higher unemployment than necessary.”
The decision comes as bets on more rapid easing by central banks throughout the developed world have increased, amid signs of a weaker US economy and subsiding inflation. The Riksbank started taking borrowing costs lower already in May this year, followed a month later by the European Central Bank.
Governor Erik Thedeen and his deputies in June outlined a plan for cautious loosening of monetary conditions that they said would entail two to three additional quarter-point cuts by year-end.
More recently, anticipation of more rapid cuts have increased in tandem with shifting expectations on easing by the US Federal Reserve and the ECB, and as Sweden’s CPIF rate of inflation has been below the Riksbank’s 2% target for two consecutive months.
Given the convergence of expectations on Tuesday’s announcement, markets will pay close attention to what the Riksbank says about future interest-rate cuts.
Back in June, Thedeen signaled officials could lower the benchmark rate to either 3.25% or 3% by year-end. Domestic forecasters are currently split between those expecting quarter-point cuts at every remaining meeting this year, taking the rate to 2.75%, and others who expect a more cautious approach that will see it end 2024 at 3%.
What Bloomberg Economics Says...
“The guidance from policymakers at the June meeting was broadly split between two to three cuts in the second half of 2024. The central bank could switch this month to signal a higher probability of two additional cuts after the August move and even flag that risks to the rates outlook are tilted toward further reductions.”
—Selva Bahar Baziki, Bloomberg economist. Read her full preview here
While recent economic data from Sweden have been mixed, a weakening labor market and a worse-than-expected initial estimate of second-quarter output indicate that an expected recovery may need more fuel to materialize in earnest.
Among those hurt are retailers suffering from a decline in consumer spending. Maria Mikkonen, chief economist at the industry’s lobby Swedish Commerce, said she would prefer to see a larger cut this week as traders need lower borrowing costs to regain confidence.
“It’s time for the Riksbank to step off the brake and start cutting rates,” she said in an interview last week. “That’s our message, based on the fact that the industry we represent has been hit very hard for a very long time.”
However, the Riksbank may still be wary of repeating past mistakes as it was slow to react to rising inflation in 2022, and officials remain concerned about the risk that krona weakening will contribute to inflation through higher prices on imported goods. The decision comes less than a week after the central bank in neighboring Norway said it will keep rates unchanged as it fears that Norwegian krone weakness will fuel prices.
“To me, the krona’s importance is diminishing as we should get rate cuts from the Federal Reserve and the ECB,” Persson at Swedbank said. “The development in the US is helping, and more importantly, the Riksbank should further increase its focus on domestic conditions.”
Rate cuts are likely to aid households relatively fast, as homeowners in Sweden typically have mortgage rates fixed on three-month terms. However, Swedish Commerce’s Mikkonen noted that total interest-rate costs are still likely to exceed last year’s, and any easing now won’t bring immediate relief for retailers who are also facing increased competition from Chinese low-cost e-commerce.
“It’s necessary to start stimulating households’ purchasing power,” the chief economist said. “If we want to keep this industry, we need rate cuts now.”
--With assistance from Joel Rinneby.
©2024 Bloomberg L.P.
