Riksbank cuts rates, opens door for faster easing

Summary

• Sweden's central bank—the Riksbank—lowered its policy rate 25 bps to 3.50% at today's monetary policy announcement, its second rate cut this year. The accompanying commentary was dovish in tone, with policymakers citing a continued deceleration in inflation and weak economic growth as the driving factors behind the decision. Policymakers signaled that “the policy rate can be cut somewhat faster than was assessed in June”, and that rates may be cut two or three more times this year.

• A broad range of economic data, in our view, supports the Riksbank's more dovish announcement. GDP looks to have declined in Q2 and household consumption has been weak, and sentiment surveys are consistent with only modestly positive growth moving forward. Wage growth has started to slow, and inflation has already returned close to target.

• As a result, we expect the Riksbank will ultimately deliver on the signal of faster easing from today's announcement. We expect 25 bps rate cuts at the September, November and December announcements, which would see the policy rate end 2024 at 2.75% (compared to our previous forecast of 3.00%). As the policy rate moves closer to a neutral level we forecast a more gradual 25 bps per quarter pace in 2025, with rate cuts forecast in March, June and September next year, which would bring the policy rate to a low of 2.00%.

Riksbank cuts rates, hints at faster easing ahead

Riksbank policymakers lowered the policy rate by 25 bps for the second time this year to 3.50%, in line with consensus expectations, and offered dovish commentary in the accompanying monetary policy announcement. Officials highlighted a continued deceleration in inflation and weak economic growth as the driving factors behind their decision to restart the easing cycle. Policymakers appear to be reasonably confident that inflation can sustainably return to the 2% target, due to developments in CPIF inflation, long-term inflation expectations, and other indicators such as producer prices and company pricing plans. Officials point to a moderation in wage growth as another supportive factor for inflation returning to target. The central bank's monetary policy update also highlighted recent softness in economic growth, noting a weaker-than-expected GDP growth outcome in Q2-2024 and characterized the country as in a mild recession, with household consumption and housing investment driving the weakness. Labor market developments were described as “subdued”.

The Riksbank's forward guidance in this announcement was more dovish than previously. Policymakers signaled that “the policy rate can be cut somewhat faster than was assessed in June”, at their last meeting, and that if the inflation outlook continues to be consistent with CPIF inflation sustainably returning to target, “the policy rate can be cut two or three more times this year.” This introduces the possibility of one more policy rate cut in 2024 relative to what officials signaled in their June statement. Finally, policymakers touched on risks to the outlook. They called out geopolitics, local and global economic activity developments, and the krona exchange rate as uncertainties in the outlook that could affect their future conduct of monetary policy. While it is possible that some of these risks could result in upward price pressures, we still view this decision and statement as clearly dovish as policymakers appear to be focused on the slower inflation and softer economic growth data seen as of late.

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