(Bloomberg) -- The Riksbank held rates steady and said it may lower borrowing costs as soon as in the first half of the year, pivoting from a tightening campaign that tipped the Swedish economy into a recession.

Policymakers led by Governor Erik Thedeen kept the central bank’s benchmark interest rate at 4% on Thursday, as forecast by economists. If price increases keep abating, a cut could be on the cards before the end of June, it said.

“We believe that inflation will come down, and we have become more certain of that,” Thedeen said at a press conference in Stockholm. “If this favorable development continues, a rate cut during the first half of the year cannot be ruled out.”

The new message marked a “massive change” from the previous guidance, Nordea Bank Abp chief analyst Torbjorn Isaksson said in a note, as the central bank in November indicated that the benchmark rate wouldn’t drop below 4% until the second half of 2025.

While a shift had been anticipated, economists expressed some surprise about the bank’s time frame for when easing may begin, and the Swedish krona fell after the decision. It traded as much as 0.4% weaker at 11.2829 per euro, trimming an almost 5% gain against the common currency over the past three months, the biggest across Group-of-10 peers.

Thedeen said that while there may be an opening for lower borrowing costs ahead, there are still risks of setbacks, including price hikes as a result of geopolitical turmoil, and businesses’ eagerness to transfer cost increases to customers. A krona weakening may also prompt an adjustment of current plans, the governor said. 

“We believe that the krona should strengthen,” he said. ”But there is genuine uncertainty and if there is a setback with a weakening trend in the coming months, it will have an impact on the design of monetary policy.”

Nordea’s Isaksson said that the central bank’s announcement was somewhat more dovish than expected.

“The inflation readings for January and February will be important ahead of the next monetary policy meeting,” in March, Isaksson said in a note. “We expect inflation to undershoot the 2% target as from mid-2024. Today’s message from the Riksbank strengthens our view of a first rate cut in May.”

The Riksbank also announced that it will expand sales of government bonds amassed during the pandemic and the preceding period of slow inflation. The divestment of assets with a nominal value of 6.5 billion kronor ($620 million) a month, up from 5 billion kronor previously, is aimed at normalizing the bank’s balance sheet and increasing market liquidity.

That could also contribute somewhat to underpin a strengthening of the krona that’s traded at weak levels over the past year, helping to reduce the risk of imported inflation.

What Bloomberg Economics Says:

“The Riksbank is getting ready to discuss rate cuts, even as the central bank delivers faster quantitative tightening alongside a pause in rates in the first meeting of the year. Our current baseline rates call is for the central bank to remain on hold through the first half of 2024, and to deliver its first rate cut in August. We see the policy rate at 3.25% by year end. However, we recognize that risks of an earlier rate cut is gaining ground, especially if major central banks kick off easing cycles sooner-than-expected or before what was signaled.”

— Selva Bahar Baziki, economist

The tightening campaign launched in April 2022 by Thedeen’s predecessor, Stefan Ingves, has had a mounting impact on the Swedish economy, as consumers have cut back spending, housing construction has plunged and highly leveraged property owners have struggled to refinance maturing debt.

Still, the largest Nordic country narrowly returned to growth in the last three months of 2023, and hopes have increased that its economy will begin a recovery later this year, helped by lower borrowing costs.

Lars Kristian Feste, head of fixed income at Ohman Fonder, said by email that Thursday’s commentary confirms that monetary policy is likely to be less restrictive during 2024. The investment management firm believes the Riksbank will cut during the second quarter of this year, most likely at the meeting in the end of June.

No new forecasts were included in the central bank’s monetary policy update, in contrast to larger monetary policy reports it publishes four times a year. Still, Thedeen signaled investors should not draw conclusions from the format, telling reporters that rate moves are equally likely at meetings where no forecasts are published.

--With assistance from Anton Wilen, Christopher Jungstedt, Charles Daly, Joel Rinneby, Jonas Ekblom, Harumi Ichikura and Constantine Courcoulas.

(Adds comments from Riksbank governor, analysts from third paragraph.)

©2024 Bloomberg L.P.